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Three Things Every Trader Should Know About Volume

Jan. 08, 2014 11:55 AM ET
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Seeking Alpha Analyst Since 2009

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How often do you hear a trader, investor or the media talk about volume? I would wager that you hear about this topic pretty often. As you may know, volume is the number of shares or contracts traded in an equity during a specific period of time. While that definition might seem helpful, it really doesn't tell us what we need to know about volume, or how to use it properly. In this article, I will detail three helpful tips on how you can use volume to your advantage each and every trading day, regardless of the time period that you are trading.

1. When stocks move higher or lower with heavier than normal volume, it is a signal that the institutional money is involved in the equity. Why would this be important? It is important because the institutional money moves stocks and equities, it is not the individual investor at home trading a 100 shares of stock that move markets. Anytime you see a surge in volume it means the big money crowd is involved, and that could mean further upside or downside is very likely in the near term.

2. Traders should always watch for high volume moves from the past. The reason why traders and investors want to watch for high volume moves from the past is because that is generally an area where the institutional money (big money crowd) will support a stock should it decline into that area on lighter volume. See the chart below for an example of this.

3. Volume is a leading indicator. These days, there are so many traders that rely on oscillators and algorithms for trading and investing. Almost every oscillators and algorithm that I have seen is lagging the current price of an equity. Have you ever wondered why a stock or commodity didn't move the way you expected it to move when a MACD or stochastic crossover has taken place? It is because these are lagging instruments, not leading. Volume happens in real time and it always tells us what's happening as it is moving.

Understand volume and how to use it like the Pros. In doing so you will give yourself an advantage over the masses who do not know how to read/utilize volume properly. The three tips above should help you get started.

Nick Santiago

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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