This is an excerpt from the Liberated Stock Trader Academy Book and Training Course. Chapter 9, Section 2. This section covers everything you need to know about how to interpret Volume and Price Volume Indicators, such as Money Flow, On Balance Volume, Time Segmented Volume & Cumulative Moneystream.
The Price Volume Relationship
There are some essential characteristics of volume and price in the marketplace.
Price Up–Volume Up (PUVU) Price moving up on increased volume. This is bullish as it shows us that more participants are interested in selling the stock at higher prices and that, most importantly, more people are interested in buying the stock at those higher prices. In an uptrend, this signals the trend will continue; in a downtrend, this signals a possible correction or change in the trend’s short-term direction to upwards.
Price Up-Volume Down (PUVD) in an uptrend is very bearish as it suggests that although prices are rising, there are fewer participants suggesting people are backing away from the higher prices. This also infers that the trend is weakening. In a downtrend, it indicates a continuance of the downtrend.
Price Down–Volume Up (PDVU) in a downtrend may signal that a change in trend is likely; as we saw with the “Blow off bottom,” there might be a huge selling climax, then the trend adjusts from down to sideways or down to up. This may indicate a crisis, panic selling, or simply when a stock is going out of favor in an uptrend. The pressure is on the sell-side, and to sell, they have to accept lower prices. A robust negative signal!
Price Down–Volume Down (PDVD) in a downtrend can suggest that the retreat is slowing or beginning to end as fewer people are interested in buying or selling the stock at these prices. In an uptrend, this may indicate the stock is stopping for breath or due to a pullback before continuing on its upward trajectory. Volume tends to trend in the same direction as the price trend. Hence, PDVD also suggests a continuation of the primary downtrend or a pullback and a possible continuation of an uptrend.
So you see not only the price but the direction of both price and volume is essential. This is where the Price Volume Indicators play an important role.
Other Chapters of the Liberated Stock Trader Book are listed below
This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and microeconomics
This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles, and how to spot them.
What are stock market cycles and the cycles of business and economies? Important information that you need to appreciate as part of your core analysis.
Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.
Stock screening means using criteria to shortlist the kind of stock that you want to purchase. A vital part of any stock market training
Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis help with.
Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend, and estimate how long the trend will last. Vital for you to establish buy and sell signals.
Which indicators should you use, there are literally hundreds of stock chart indicators? Each has a specific use case and application, which should you use?
Volume is a vital indicator along with the price. Both of these you need to understand in granular detail, you will learn everything you need to know.
Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.
How are the market participants feeling? Positive, Negative, or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Learn how to use them to your advantage.
Understanding how you want to invest, how much time you have, and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.