How to Trade Using Volume

The common approach to using volume as a technical indicator is to consider rising volume as adding momentum to price movement.  So if a stock is going up on rising volume then it may continue this trend for some time.  Through this post I’ll explain why I believe this strategy is seriously flawed.  And more importantly, I’ll show that traditional absolute volume indicators do not even show the information necessary for you to employ this faulty strategy.

First, let’s pull up a 4-month chart of Sprint (S).  I’ve added a commonly used absolute volume indicator and the SwamiCharts volume indicator which displays higher relative volume as white and lower volume as blue.  The y-axis of the traditional volume indicator measures absolute volume where as the y-axis for the SwamiChart represents increasing lookback periods that add context.

To compare, on the SwamiChart you can easily notice that volume is increasing around May 26th as the color gradient becomes whiter.  The traditional indicator, however, is unable to inform you of this relative volume increase at all.  All that it tells you is that that volume was about 70m on May 26th.  This information is confusingly specific and does not offer the necessary “big picture” perspective.

Finally, why is it important that we know what the relative volume is as price increases before stabilizing?  Because, as you can tell, it can often be predictive of a possible reversal!  It is my belief that this sell signal is not widely held by most technical traders because the tools necessary for easily gauging relative volume are not available.

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One Response to How to Trade Using Volume

  1. Pingback: Google Not Yet a Buy | Stockwatchpro

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