As seen in the past few weeks, a news event can trigger a selloff or a rally. In the case of a rally, a leading indication of this is the rise in volume which does not correspond with a rise in price.
This kind of volume increase suggests people are buying in anticipation of some kind of news that will affect the company. There may be rumors in the market. When the news is released the price and volume rise very quickly. This is a short-term trade opportunity. The trade is closed as soon as momentum declines. This may occur one or two days after the news announcement.
In the final installment of a four-part special, looking at the price/volume dynamic, we chart the game of Pass the Parcel. The aim of this game is not to be left holding the stock when the rumor is either confirmed or dismissed in the market.
- Volume increases before the news announcement, but price does not rise
- Volume increases on the day of the news event
- Price accelerates quickly. This is a momentum rise
- Enter when price reacts to the news release
- Use resistance targets as exit points
- Sell one or two days after the news announcement when momentum declines
Recognizing the correct price and volume relationship allows traders to make better decisions with regards to the best trading or investment approach to use. This series on the price/volume dynamic has charted real examples of four different kinds of volume manipulation. The knowledge will hopefully help you trade more effectively.
The Games Traders Play
For more detailed discussion of using volume in trading, click here.
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