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Turn up the volume

Turn up the volume

When I see high levels of volume for a stock, to me it indicates a possible new era for the stock price. It says that something is happening to that stock.

Unusual volume An indicator

Volume is one of the simplest and most undervalued indicators around.

Like indicators in general, volume alone does not give the whole picture. It doesn’t tell us which direction a market is trading in, but it can act as a warning siren that something is happening with the stock which allows us to investigate further.

You will need to use more indicators than just the volume, but it can be a useful sign to let us know that something is happening to the stock price.

High volume

High spikes in volume are a beacon of a possible new era/trend in the stock. A high level of volume usually occurs at the start of a new direction in the share price.

For example, using Bell Direct’s unusual volume tool, allows you to view the top stocks that have seen a volume change with either an increase in share price or a decrease in share price.

So why is this important and how can you use it as part of your trading strategy?

Help in your trading strategy

Here’s a list of the top three for both categories at 2.30pm on Wednesday 26 August and the news that accompanied that movement:

% price          % Vol Change                  News

  1. RNG       26.3%            14894%                            Excellent drilling results 26/8/09
  2. NQM       4.9%              10416%                            Revised profit forecast 20/8/09
  3. BBI         65.5%            4641%                             Profit announcement 26/8/09

% price

% Vol Change

News

SEK

-2.6%

37203%

CMJ sells stake in company 26/8/09

SOO

-18%

2621%

Record profit 25/8/09

ADO

-23.5%

1958%

Signs co-op and licence agreement 20/8/09

As you can see, most of the time, high volume is a warning that there is new information that is out about the company or renewed interest in the company.

Volume change

A jump in volume is significant because it can frequently signal the start of a new trend. Like the accelerator pedal on a car, the harder you press down, the faster the car goes. In the same way, the higher the volume, the more strength in the move of share price.

If the stock is trending up on increasing volume, it’s a good sign of strength. Conversely if a stock is trending up but with decreasing volume, it’s time to beware as the move seems to be running out of steam.

Look at prices for potential

Share prices are a reflection of future profit potential.

So, if a company comes out and says that their profit is going to increase in the next year by 100%, then that tells me the underlying business value is going to increase. Logically then, the share price should also break up on the upside.

Conversely, if I see high volume but the company has released new information that it expects profits to decrease in the future, may mean decreasing business value. Logically, the share price should break out downwards.

So take a look at unusual volume tool – you may be able to turn unusual volume indications into insightful stock choices.

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