Day trading seems easy at first, right? But soon you realize that you won’t get too far just looking at the price chart alone. You also have to keep the volume dynamics in mind.
Let’s say we have a stock that’s topped out. It’s at $1.80 and it’s creeping up to $2. It’s obviously going to break the $2 mark, but you need confirmation before you enter the trade. That’s where the volume chart comes in, that’s your indicator.
In this video, I describe 4 different volume dynamics as the stock hits a $2 mark:
- No change in volume. Because of the lack of interest, it goes back to $2 and holds there for a little bit. No volume means that no one is interested and it’s unlikely that the stock will continue going up. Most probably, it will hold at $2 for just a few minutes and will break down soon.
- It breaks out with a huge volume - which is a great sign - and then goes up to $2.10, and then immediately goes back down with a huge volume too, maybe even below $2. That’s a sign that there’s a lot of sellers out there, and a lot of people took an opportunity to get out at a great price. It’s a fakeout breakout.
- It breaks out with a huge volume and goes to $2.40, but you’ve missed it. At this point, you’re better off missing it altogether rather than chasing it, because more times than not it’s going to come back down. But keep an eye on volume: if it spiked at a huge volume and went down with a low volume, it means that there’s still a lot of interest out there, and the stock will most likely go back up over time.
- If it breaks out at a mediocre volume, stays at $2 for a half-hour and then picks up more volume, that’s an indicator to get in as the price will most likely go up.
Volume represents interest. It describes the supply/demand curve that constantly effects the price of the stock. It also describes market expectations, giving you a hint when to jump on the bandwagon and profit from the trend.
If you’re trading without looking at the volume chart, you’ll miss out on all these dynamics. You need both the volume and price charts to make an informed decision.
01:22 Case study: the stock is breaking out at $2