103-12 Indicators – Volume

Volume is the fuel in a stock’s movement.

Chart volume is usually expressed as the number of shares traded that day. It is most useful to view volume indicators compared to the average amount of shares traded for a stock on average.

For example, if Volume starts to increase dramatically for the stock, we can assume there has been some news, earnings release, or otherwise external factors acting on the stock.

Look at the chart below for NetFlix (NFLX), a DVD rental “by post/by internet” company. Take a close look at Volume and price and what they have in common.

The volume indicator is configured to show a RED Bar if the closing price for the stock is lower than the opening price meaning “Negative Volume” and green for days where the closing price is higher than the opening “Positive Volume.”

Basic Volume Chart
Basic Volume Chart

So, what did you see?

What happened to Volume when the price changed?
What happened to the price when the Volume spiked?

Now let’s review the same chart in detail.

In our lesson on Volume, we focus on two key phrases.

Volume “Blow off Top” & “Blow off Bottom”

Now look at the chart below and read further for a description of the key concepts here. The chart maps Price, Moving Averages 10 & 30, and volume (Red for Negative, Green for Positive).

Volume - Detailed 3 Step Analysis & Usage
Volume – Detailed 3 Step Analysis & Usage

3 Key Steps Referenced in the chart.

Step 1

Here at point 1, we see a considerable change in the direction of price; it was proceeding in a downward trend, then suddenly there was a spike in Volume over two weeks; this is known as a “blow-off bottom.”

It indicates that a key price has been found, where the sellers have lost enough that they need to sell the stock, and the buyers have seen the price decrease enough to see real value in the stock. Of course, other factors contribute, like good news or earnings results. Whatever happened, Volume increased!

Step 2

The stock here increases from $20 to $38 in the following three months, a 90% increase, but how would we know this was about to happen. Well, buying at the time the moving averages crossed over would have been a good option; it would not have provided the full 90%, but it would have produced 40%, which by anyone’s reckoning is an excellent result. However, here we see a monster, “Blow off Top,” the enormous red Spike; this is a powerful sign to sell as soon as possible.

From stage 2, we see the stock move in a sideways pattern and eventually decrease back down to $19; the ride is well and truly over. However, you would not own the stock, as you would have sold when the moving averages crossed.

The stock price starts to increase in mid-November 2008, but Volume tells us nothing; WHY?
Indicators do not tell us something 100% of the time, but we need to recognize it when they do. The moving averages cross at $25, an excellent time to buy.

Step 3

Here we see massive buying; the Volume goes through the roof. Important to note here is that we are comparing Volume for the stock to its history. This is the second biggest volume surge of the year for Netflix and is significant.
Why did it take off? We should always seek enlightenment!

It reported excellent earnings, and because of the recession, people were switching from buying more significant ticket items such as Cars and Plasma TVs to staying at home and renting movies. Netflix reported a massive increase in new members.

In the chart, this note shows that the price “Gapped Up.” What does this mean? This means that the stock price in extended-hours trading was so strong that the Opening Price on the following day was significantly higher than even the High for the previous day, thus showing a gap in the price pattern in the chart.

Warning: Some volatile stocks show a lot of Gaps in price. While price gaps might sound good when they gap upwards, if they gap down against you, then they are awful. Avoid stocks with any history of strong negative gapping as gaps do not allow you to sell at the price you want to.

3 Step Analysis Summary

So what did we learn? Volume is essential, and reading it should become second nature. Especially when searching for winning stocks, we ideally should look for stocks with increased Volume, so we have more chance of a quicker, less risk win.

This will be discussed in Trading Strategies in a later training module.

This was a lot of information, and it is a vital tool in your toolbox.

Further Reading

Stock Volume: How to Use Volume in Charts Like a Pro

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