Wednesday, July 25, 2007

Lesson8:The Importance Of Volume

Technical Analysis: The Importance Of Volume

What is Volume?
Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security.

to download above chart:
http://lh6.google.com/geniusjaggu/RxtHwbIl65I/AAAAAAAAAGg/4B8vcqbZkro/reliance%20volume.jpg

Why Volume is Important?
Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume.

for example, a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day, relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal.

Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa).

If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend.

For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end.

Volume Precedes Price
Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.
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