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Online Investing Hacks by Bonnie Biafore

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Hack #50. What’s Volume Got to Do with It?

Because most charts and indicators rely solely on price, trading volume can provide an independent confirmation or contradiction to the signals you see.

Indicators and chart patterns aren’t infallible. Their predictions don’t always come true. To increase the likelihood that you’re getting the right signals, most technical analysts look for confirmation before executing a trade. The problem is that most indicators rely on price, so each price-based indicator operates on the same price data and often confirms any other price-based indicator. What you need is an indicator that doesn’t rely on price—and that’s volume, which represents the number of shares traded during a period.

How Volume Confirms Price

Volume has become the standard for testing the validity and trustworthiness of a price-based signal. “Volume precedes price” is the Wall Street saying, and indeed it often does. When volume increases, the trend of the market or a stock usually continues in the same direction. However, declining volume often signals an upcoming trend reversal.

Many technical analysts evaluate volume from period to period simply by displaying volume bars below a line, bar, or candlestick chart, and visually comparing how volume tracks price movements. For example, you can look for volume changes as price increases or decreases. The magnitude of the volume change and its direction can tell you whether the price movement is significant:

Price goes up and volume ...

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