Volume is the fuel that drives the market. Charts yield clues when volume is out of character. High turnover on a lower close indicates selling pressure -- people want to get out and no one is eager to buy, so the price falls. High volume on a stronger close indicates buying pressure -- people want to get in, but nobody is willing to sell, so buyers must bid higher.
In the third installment of a four-part special that looks into the price/volume dynamic, Charting Asia delves into volume activity reflecting a fast moving rally that, if traded correctly, can deliver good short-term profits for low risk before the rally retreats or moves sideways.
Catch That Rally!
Rally behavior is important as it's often the beginning of a change in the trend from down to up. Unfortunately many people think every rally is the beginning of a new uptrend.
A rally provides a five to ten day trading opportunity and must be managed with a tight stop loss. The way volume increases with price, separates a genuine rally from a skilful example of price manipulation in a 'pump and dump' scheme. It also tells the trader when there's a 'dead cat' bounce. These are the rules.
· Stock has a history of good trading volume with well defined rises and falls
(Reference the corresponding charts on the left)
· Volume increases for several days
· Price moves slowly, and then accelerates. This is defined with a parabolic trend, or a trend line
· Volume increases as the price begins to move more quickly
· Enter when price rebounds from the trend line
· Use resistance targets as exit points
· Watch momentum and volume decline. A rapid decline in volume with little change in price is a sure signal of a 'dead cat' bounce.
For more detailed discussion of using volume in trading, click here.
In the next column which will be published on Thursday, we will bring you the last installment on our special volume feature -- Pass the Parcel.
Daryl will be charting requests live on Asia Squawk Box Wednesday, 26th November, 7 a.m. to 10 a.m. Singapore and Hong Kong time. If you'd like Daryl to chart a specific stock, commodity or currency on air, send your requests to email@example.com.
The Games Traders Play
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.
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