Using Volume For Stockmarket Trading

By George Polizogopoulos

Using the On-Balance Volume
On-balance volume was the most widely used stock market tool for several decades now. It is a technical analysis indicator that was designed and fully intended to connect the relationship of two important aspects of a stock market which are the price and its volume. This indicator is based primarily on a running cumulative total volume.
This indicator will treat the volume as a plus when it is an up day and a minus on a down day. This would simply means that an up day is where the closing of the present day is higher than the closing of the previous day. When this happens, the volume will be added. But when it happens that the previous day's closing is higher than the present day, then it will be considered a down day with the volume correspondingly subtracted from the cumulative total.
Actually, this technical analysis indicator is a tool to confirm price movement. The concept is based on the premise that volume will be higher on trading days where the price moves in a positive direction. And volume will accordingly diminish when prices moves negatively.
It is therefore logical that when prices are going up so will the OBV and when prices will make another upward run so does again will the OBV. But if OBV fails to pass its previous day high, then it would suggest a down day or a weak day.
Weighted Volume - A More Effective Indicator
A simple way of refining more the OBV indicator will be to take the weighted volume of the day's market transaction to have a more comprehensive grasp of the market. This procedure will be to compare the daily volume with the average recent volume.
With the use of a composite indicator you can then get the weighted volume index when you measure and input the actual price movement.
By using this approach, you can be assured of a more reliable way of gauging the market as this approach considers the volume and its relationship to comparative price direction. Another benefit that you can gain by using this method is that you can easily identify abnormality of price and volume movements.
Utilizing the Volume Spread Analysis
Volume Spread Analysis creates the opportunity for skilled and professional traders to be able to buy stocks wholesale while the market is moving up and then again to resale this huge wholesale stock that they bought piece by piece to individual and small time market traders.
This stock retailing by professional traders is done without affecting the movement in the stock prices since they have already figured out the price movements through their visual reading of the volume spread analysis.
In real terms, volume spread analysis is what most professional stock market trader's use in playing the market. The analysis is interplay of three important variables that they have to monitor to correctly determine the market. These variables are the amount of volume on a price bar, the rice spread of the bar and the closing day price range.
These variables are simply hard to detect and so traders with large holdings plays these variables through visual detections. If they play it right, these traders will be able to know where the money is going and they can then unload their holdings to these small market players while maintaining the positive price movement of the market.
The Best Volume Signal
Finally, if you happen to be a small time trader, you can try finding for the best volume signal in the market. Once you learned of a steady slide in the market, try to gauge the movement. Try to be patient and do not immediately pounce on some short backing but do time your move for that upward thrust that sometimes follows a heavy downward spiral. This upward burst is a counter trend but will give small traders good earnings on the side.
George Polizogopoulos is a staff writer for MyShareTrading.com, an information hub for share trading including forex trading, derivatives, options, warrants and CFD's.
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