Many of the readers already know much of my philosophy about trading. I like to enter positions with my initial exit in mind before I enter; I believe that money needs to be managed and trades made with equal percentages of risk money (3% to 5%); I must be aware of and understand the risk(s) I am taking with each trade; I must be aware of the potential reward to risk ratio before I settle on a play; I need to be disciplined. With Trend Trader, for example, I am always opening positions by buying stock. That means I will only enter positions where it looks like the stock is going to go up. Certain clues may help. For example, have the markets been moving up, is the sector moving up, is the stock moving up, are there any reversal signs? How can I get a handle of what's going on overall and with any given stock?
I am basically a technical trader. For me, that means I try to base my entries and my exits upon the chart of the stock. Sometimes, I will select a position based completely on technicals and totally disregard fundamentals. For example, I may see the chart on a fundamentally strong company and realize that the stock just broke a strong support, fell below the 200 day moving average, had a MACD crossover, etc., etc. I probably would not hesitate to take a bearish position (like selling the stock short or buying puts or creating a bear call spread) even though it was a sound company. I know I could reverse to a bullish position if the stock turned back up.
Of course, in much of my trading I do look at fundamentals and try to find good combinations of fundamentals and technicals that provide a potential trade.
What I'd like to explore here is the value of price and volume (in chart form) in determining continuation of a trend and potential reversals. If we have some basis to believe a turnaround might be in the offing, for example, wouldn't it be a good idea to tighten stops or wait to make entries until the issue is determined? I suggest that price and volume can give us a whole lot of insight into what is going on in the market, sector, and individual equity.
Take a look at the following combinations of price and volume and ask yourself whether each is bullish or bearish. Test time!
Price Up & Volume Up
Bullish or Bearish?
Price Down & Volume Down
Bullish or Bearish?
Price Down & Volume Up
Bullish or Bearish?
Price Up & Volume Down
Bullish or Bearish?
Any problem figuring that out? Of course, when the price is up and the volume is up, that's suggestive of bullishness. What if the price is down and the volume is down? Or what if the price is down and the volume is up? In my classes, students, at first may be confused by the implications of those two combinations. If the price is down and the volume is down, that is usually bullish. What that is saying is although the price is down, there isn't a lot of support for a move in that direction. If there isn't support for the move down, the conclusion is that the combination of price down and volume down is bullish. If there is support for the move down (price down, volume up), that is generally a bearish signal. Finally, when the price is up and the volume is down, that is bearish because the up move is not being supported by volume.
I look for these combinations as I view charts of the markets, sectors, and stocks. The information price and volume conveys can be quite helpful in suggesting whether a trend is continuing or whether a reversal seems to be in the offing. When I use that information, I have at least one piece of extrinsic evidence to help me arrive at my opinion of what the respective market, sector, and stock may do. It removes me one step, at least, from trading on emotion. I believe the more emotion I can remove from my trading, the better trader I'll be.
Bill Kraft, Editor
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