| Volume Patterns For Profitable Trading |
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| Written by Barry Taylor |
| Thursday, 03 June 2010 15:34 |
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Although many professional traders rely on the pricing patterns for individual equities and other investments, the identification of volume patterns aids in confirming the beginning, middle, or end of an existing or newly occurring trend. Volume patterns, though often unused by amateur traders, are very important to establishing profitable positions. We'll identify a few common volume patterns and how to identify them.
Although many professional traders rely on the pricing patterns for individual equities and other investments, the identification of volume patterns aids in confirming the beginning, middle, or end of an existing or newly occurring trend. Volume patterns, though often unused by amateur traders, are very important to establishing profitable positions. We'll identify a few common volume patterns and how to identify them. Profit Taking Volume Pattern 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. Stopping Volume Patterns Stopping volume patterns are very much like other topping indicators. The stopping volume pattern appears only when the volume is greater than the previous timeframe and the range is also smaller than the same period. Also, the stock must close off its high or low and do so on volume that is greater than the previous time period. When these criteria are met, you've found a stopping volume pattern. Trade in Reverse Reversal volume patterns are similar to the stopping patterns, but have a few differences. First, volume is important only when the chart is bottoming, and investors should wait for the volume to rise before pointing out a reversal pattern. However, on the flipside, a reversal in a rising trend does not require higher volume, though greater volume can be used as a confirmation tool, as trends that reverse with greater volume generate more accurate signals. For accuracy, the stock should already be at the top or bottom of the viewable trend, and a reversal volume pattern should never be identified at a price near the middle of a current larger trend. Judge Supply and Demand with Volume Patterns Reversal volume patterns generally come with a technical trend on the price chart. A reversal in price should be confirmed with an increase of volume when making a new bottom. Likewise, it is generally a good thing to see stronger volume when reaching a new high before reversing, although an increase in volume is not a necessity for topping reversals. Volume Counts Volume patterns should be employed by technical traders as a way to gauge future price movements based on criteria that is not entirely dependent on price. Often, traders who look only at price and not the volume of the security being traded fail to see upcoming changes in the trend. Consider giving volume patterns a try; you might just find you become more consistent and profitable. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Watch your profits grow when you capitalize on tick chart trading. Learn more about tick charts through Barry Taylor's blog, which has been mentioned by Reuters and Yahoo! Finance, at http://Emini-Watch.com. |