There are 2 main usages of volume:
1 Eliminate company with very small and no volume at all (small movement of price with no trend)
Stock price is moved by investors who make buy and sell decisions. Low volume and no volume means there is very little investors monitors that stock. Even the stock is undervalue or provide good financial results, the stock price will not move because no investors buy to push up the stocks.
For technical analyst, no volume and little price movement hard to become indicators to predict the future trend. So mostly they will also avoid stock with low volume.
2 Volume can show the types of investors and the condition behind this stock
There are two significant players in the stock market: main power and retails. These two players have the power to influence the stock volume which in turn will be shown by looking at the volume and the condition where the volume occurs.
There are certain rules of thumb:
For price up, there are 3 different conditions
1 Price up, volume up: short term buy in
When price up, volume up means the increase of stock price is recognized by retails. Since more retails will spot this stock and continuous buy in, the stock price will increase in short term.
2 Price up, volume constant: long term buy in
Main power can push up the price easily without much selling power. It means the price is still undervalued and the increase of stock price still have a long time to go.
3 Price up, volume down: short term sell out (very rare)
It means although main power push up the price, the retails do not want to buy in maybe due to the price already too high(especially when the price already increases for a certain period). When main power cant attract the retails to buy their shares, they will stop buying (afraid cant sellout), it will cause the stock price comes to a correction.
For price constant, there are 3 different conditions
4 Price constant, volume up : prevent changes of trend
Especially happen after long time of an uptrend, volume up means retails are still buying in, price constant are due to the selling of main powers. When main powers start to sell out their share tremendously, it means the up trend will be over soon.
5 Price constant, volume constant: See condition
This situation means the buy side and sell side still on the watch, the future trend still not clear.
6 Price constant, volume down: Strong trend
When this condition happen especially in the correction in uptrend, hurry buy in. price constant during correction indicates a strong trend, (no strong selling), volume down means sellers who are willing to sell at current price become lesser and lesser.
For price down, there are 3 different conditions
7 Price down, volume up : Run no way
It means retails recognize such a price fall and sell together. Because retails are selling on panic, such a price drop will cause an even larger panic.
8 Price down, volume constant: Down trend continue
If the condition happening in a down trend, it means there are no strong buy powers willing to accept the stock in current stock price. If it happens in a correction in uptrend, it means the condition still not clear, need to wait until price break the resistance line still decide whether want to buy in.
9 Price down, volume down: Correction Over
If this condition happen in the correction during uptrend, its effect is same with the "price constant volume down" effect, just the trend is not as strong as that, it means the correction will end soon and start another price increases. If it happens in a down trend, it means the sellers do not want to sell at such a low price.
Above 9 thumbs of rule can only be used in a normal uptrend or downtrend. A normal trend means there is nothing important news happened to that particular company or to the whole stock market during the trend.
Continue to Step 5: "Candlestick"
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