| Volume Patterns For Accurate Signals |
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| Written by Barry Taylor |
| Wednesday, 09 June 2010 15:24 |
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Many amateur investors see volume as just another pretty element on the screen. It often gets thrown in with the reds, greens, shades of yellow and blue investors are all too familiar with seeing on their trading station. However, volume is more than just another indicator. In fact, volume patterns may be the best indicators investors have to obtain accurate signals for entry and exits. Here are just a few popular volume patterns and how to identify real volume patterns from just bars on the screen.
Many amateur investors see volume as just another pretty element on the screen. It often gets thrown in with the reds, greens, shades of yellow and blue investors are all too familiar with seeing on their trading station. However, volume is more than just another indicator. In fact, volume patterns may be the best indicators investors have to obtain accurate signals for entry and exits. Here are just a few popular volume patterns and how to identify real volume patterns from just bars on the screen. Profit Takers Volume Patterns The profit taking volume pattern can only occur after the following criteria are met. First, the stock or index has to reach a new high, which helps establish that there are traders currently holding profits. Next, the volume has to be greater than that on the previous day or bar. The total range of the stock or index should be less than the previous day or bar, and finally, the stock or index should close away from the daily high. Closing off the high is important, as it illustrates that traders were willing to sell at the high with enough force to push the market lower. An End to a Trend: Stopping Volume Patterns The stopping volume pattern is very similar to the profit taking pattern and utilizes much of the same criteria. In a stopping volume pattern, the volume must be greater than the previous bar or day, and the range must also be smaller than the previous bar or day. Additionally, a new high or low must be made, and in an uptrend, the stock must close off its high, or in a downtrend, it needs to close off its low, indicating a willingness to reverse. Trade in Reverse Demand and supply volume patterns are perhaps the most effective since they gauge how much further investors are willing to push a trend. When demand runs weak, investors know that buyers are satisfied with their positions. When supply runs weak, all the selling that will occur already has. These two volume patterns require the heavy use of trading software, which helps show the difference in supply and demand within a volume pattern. Reversal Volume Patterns The supply and demand volume patterns are the best way to understand how bullish or bearish the rest of the market is. When supply ebbs, investors should be aware that sellers aren't interested in dumping their stock at a certain price. Similarly, when demand falls, investors aren't willing to buy at the current price. These volume patterns are very important to establishing strength and weakness and getting an idea of where investors are likely to push the price. Trading with Volume Patterns Investors often make the assumption that all the important data they need to make accurate trades can be found on the security's price alone. This is nothing more than fallacy, as volume and the amount of traders interested in an equity have a huge impact on where the price is likely to rise, where it is likely to fall, and at what price an investor has an incentive to make a trade. With the proper use of volume patterns, investors can see their trade accuracy and profitability increase without huge adjustments to their trading plan. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Gain insight into what the professionals are trading by adding tick charts to your platform. Take advantage of Barry Taylor's insight into tick charts through his trading blog, which has been featured on Reuters and Yahoo! Finance, at http://Emini-Watch.com. |