Using Volume To Predict Price Movement

Focus: STRATEGIES

Tim Bourquin Image Tim Bourquin Co-Founder, The Traders Expo and The Futures & Forex Expo

Day traders often find themselves overwhelmed with complex technical indicators, moving averages, and complex algorithms. However, sometimes it helps to step back and get back to the basics. One of those basic indicators is volume (the number of shares bought and sold in any given day). Not long ago, a hundred million share day on the New York Stock exchange would have left brokers breathless. Volume has increased dramatically over the past few years, the simple result of there being more money in play, driven by sharp increases in mutual fund and hedge fund assets. Now, in the wake of record-shattering days in the Dow, volume has spiked, and recently topped one billion.

As long as there has been trading, investors have used volume to get a read on where stocks are headed. And unlike most of the tools technical analysts use, this one is easily found on almost any financial Web site or in any daily newspaper with stock tables (usually expressed in thousands of shares).

A trader can't live or die by any one indicator. But understanding volume can provide insight into a stock's behavior to help you determine its overall health. The most important rule is this: volume precedes price. Typically, before a stock price moves, volume comes into play. The beauty of this indicator is its flexibility. Changes in volume can be used intra-day to determine short-term price movement or over several days to determine a stock's two to three day trend direction.

Before learning how to interpret volume, you have to know what is calculated. The first step is to identify a stock's typical trading range.