Trading the Markets: Volumes
We’ve talked about Candlesticks, Supports & Resistances and Indicators in this series. Let’s talk about volumes today, which help in confirming the power of the trends and candlestick patterns.
“Volumes” simply indicate how many shares are bought and sold over a period of time. It helps us in gaining more information about how other traders in the market are behaving. Just as an example, if we see a “Bullish Engulfing” pattern and the volume is considerably higher than previous candles, the probability increases that the bullish reversal could happen.
The trading volume is different at different points of the time, it keeps increasing throughout the day obviously as and until more shares are bought and sold by people. Let’s talk about how looking at volumes can clear out the strength of a trend or pattern.
So, when price increases and volume increases, you can confirm a bullish bias. Similarly, when the price decreases and volume increases, you can confirm a bearish bias. But if price increases but volume decreases, you need to be cautious when buying, since the majority is not with you. Again if price decreases and volume also decreases, you need to be cautious when selling, since the majority in the market is not with you.
Now I’ve said volume “decreases” and “increases”, but in comparison to what? We discussed MAs when we talked about indicators. The same concept can be applied to volumes too. So my rule is, if the volume is consistently higher than the 20-day volume MA, I can check for trend confirmations or reversals using patterns that we talked about before. Otherwise, we are fighting against a weak market which may or may not pan out in our favour. While all of trading is a probability game, we need to skew the probability in our favour and only take trades that fit all or most of our criteria.
Below is a chart example with the MA along with the volumes.
The example marked above is one of a bullish engulfing pattern along with repeated higher-than-average volumes, which then caused/resulted in a bullish move. Keep in mind that the combination of patterns and high volumes only might not play out or might play out after a few days’ consolidation (movement in a range). You can easily spot some of these situations in the chart.
That’s it for this article on volumes. Subscribe for free to receive new posts and support my work. And do let me know if you want a specific topic covered!
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