Ready to learn how to ethically steal TONS of money from other stock market traders with this one indicator?
Steve Cohen, a master trader, is known to use this indicator for his billion dollar hedge fund company. Mr. Cohen’s trading profits average over 50% a year!
He has some 60 traders working for him. He is a master of watching a stock’s volume.
Volume is one of the most overlooked indicators by amateur traders.
Even if you think you understand volume, you owe it to yourself to read this article to make sure you understand how to correctly interpret volume for massive profits.
The meeting of minds between bulls and bears are represented in each measured unit of volume. The volume is a still picture of the psychology of the crowd trading a particular stock or market. Rising volume confirms the trend while falling volume questions the trend and whether the dominant group can keep it going.
In a downtrend, rising volume shows that panic is setting in as people run for the exists. It also shows the foolish buyers stepping in to buy betting that the market is going to turn around. Remember, in order for a sell order to execute, there has to be a buyer somewhere. Buying into a downtrend is also known as trying to catch a falling knife. It is usually a bad idea to bet that the current trend is going to change. Don’t bet against the wisdom of the crowd. Let some other fool do that. When all the sellers get out, the volume on the downside falls as the downtrend runs out of steam.
In an uptrend, rising volume shows that greed is setting in as people dog pile into the stock. It also shows sellers dumping their position betting that the market is going to turn around. Remember, in order for a buy order to execute, there has to be a seller somewhere. Selling into an uptrend makes sense only if your original profit thesis (target) has been met. When all the buyers are done chasing the stock higher, the volume on the upside falls as the uptrend runs out of steam.
But volume tells more than just the conviction of the current trend. Volume gives traders several useful clues.
A spike in volume on 1 day often signals the beginning of a new trend when it occurs on a breakout from a trading range. A spike in volume like this can also signal the ending of a trend. Very high volume that is 300% or more of the average volume signals market hysteria. This is when fearful bulls finally decide that this uptrend is for real and rush in to buy or it is when fearful bears become convinced that a decline has no bottom and rush in to sell short.
A divergence between volume and price usually means that a stock is at a turning point.
If price rises while volume falls, it is a signal that the uptrend is not attracting very much interest. If price falls to a new low and volume falls at the same time, it is a signal that the downtrend is not attracting very much interest and an upside reversal is likely. Price is more important than volume but a master traders knows how to analyze volume in order to gauge the psychology of market participants.
About the Author:
By Shawn Tilman. May this lesson help you better your trading and make a lot of cash.