Manny Backus Blog | Volume, Volatility, Liquidity For Stock Predictions | Talkmarkets

Manny Backus

Founder and President of Wealthpire Inc., A Financial Publishing Company

I am the founder and president of Wealthpire Inc., a financial publishing company.  I am also a top author at Seeking Alpha.  View my Seeking Alpha profile here.

Volume, Volatility, Liquidity For Stock Predictions

Date: Wednesday, November 5, 2014 4:34 AM EST

Every trader uses the stock price in one form or another to make stock predictions.  Some traders claim that they do not make stock predictions but merely react to price by buying or selling.  Well, regardless of what they claim, these traders are still making predictions or they would never enter a trade directionally. The direction entered is their stock prediction by default.

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Regardless of how much you know about price, price alone is not enough to make wise decisions regarding stock market trends. The other half of the equation is volume.  Volume when combined with volatility and liquidity along with price can be  powerful stock market indicators.

Volume is the number of shares traded at any given time.

Technical analysts like to see volume slowly increasing in the direction of the trend.  In other words, an uptrend should have volume slowly increasing along with price.  This indicates that others are also buying into the stock as it climbs.

Beware of Volume Spikes

If volume spikes higher all of a sudden during an uptrend, it is believed to signal that the move is almost over.  This volume spike represents the last of the investors scrambling to get into the stock.  These final investors are often wrong, therefore after they buy into the stock, share prices plunge.  If you own a stock and notice an unusual volume spike, it may be time to take profits.

At the same time, if you are looking to short a stock during an upward trend, waiting for a volume spike to short makes strong sense from a technical analysis viewpoint.

Investors also need to be alert for dropping volume.  Just like steadily increasing volume indicates that a trend should continue, dropping or decreasing volume can signal the ending of a trend.  At the very least, low volume accompanying a directional move indicates that the move is not supported and therefore weak.  Be cautious entering low volume directional moves when trading stocks.

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Manny Backus 6 years ago Author's comment

Hi Emily,

Yes, you are exactly correct. In addition, large money players like hedge funds and institutions know this psychology and sell into the buying frenzy. Thanks for the comment! Manny

Emily Zheng 6 years ago Member's comment

Thank you for replying! love your articles about technical analysis, simple but practical.

Emily Zheng 6 years ago Member's comment

Nice read! Do spikes of volume represent investors' overreaction? "This volume spike represents the last of the investors scrambling to get into the stock. These final investors are often wrong, therefore after they buy into the stock, share prices plunge. "What is the underlying understanding of this...?

Stocks I follow

ARII American Railcar Industries Inc.
DEO Diageo plc
DPZ Domino's Pizza Inc.
IGT International Game Technology

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