“Stocks that trade under 400,000 shares a day are more volatile. The biggest danger, Gessel warns, is that you don’t apply these volume rules to thinly traded stocks. It’s been building another base since December.” It then broke out in huge volume on October 2, en route to a 50% gain in just two months.
“Nu Skin built a flat base from the beginning of August to the beginning of October,” Gessel points out, “never correcting more than 11%. One key rule, according to Gessel, is that “a breakout should come on volume at least 50% percent higher than average.” For example, look at the chart of Nu Skin (NYSE:NUS): A stock rising in above average volume is generally positive.” With stocks, you want to see how the daily volume total compares with average daily volume. An index that falls in heavier volume than the day before is generally negative. “With market averages, we compare the day’s volume total with the prior sessions. Generally, stronger volume indicates a more important price change.
Since three quarters of stocks follow the general market trend, Gessel notes, it’s crucial you learn how to read the market action each day. You want to be on the same side as big investors.”īecause it can take institutional investors weeks or months to complete their purchases, Gessel says that “individual investors have a chance to piggy-back those purchases and ride those price run-ups.” If you watch price and volume carefully, he suggests, you can also detect clues it is time to get out.Īnother key benefit to watching volume is to understand the general trend of the market. “This may show that institutional investors are driving that move.
Gessel says that IBD looks for stocks that are ending a period with little or no price change and make a big price move on high volume. One benefit of volume is that it can give you signals of what the major institutional investors are doing. “It’s how we spot new up-trends as well as corrections before they are widely known.” “Price and volume are the key to IBD’s market analysis,” says Gessel. O’Neil, chairman and founder of IBD and author of the best-selling book, How to Make Money in Stocks. The CAN SLIM system was developed by William J. He describes how price and volume are woven into the CAN SLIM investing system, a top-performing strategy recognized by the American Association of Individual Investors (AAII).
Volume, combined with price, is “critical to spotting emerging trends,” says Chris Gessel, executive editor and chief strategy officer of Investor’s Business Daily.
There are dozens of systems to interpret volume data into trading signals, here is how volume plays into a couple of popular systems: the CAN SLIM ® investing system and The Wyckoff method. Volume reflects demand, but doesn’t always tell you if it’s coming from buyers or sellers, or from large players or small. The challenge, she cautions, is interpreting the data. It can show extreme enthusiasm or extreme fear and panic.” Toni Turner, an independent trader and best-selling author of A Beginner’s Guide to Short-Term Trading (Adams Media, 2008), says that she has had made more trading profits “by concentrating on reading volume than on any other indicator. With the right interpretation, volume can be a way to read the mood and psychology of the market, discover the strategies of large investors, and put price changes in context. See how two trading systems use volume to better understand price changes.įor traders and investors, volume does more than measure how many shares are changing hands between market participants within a given time period.