The Importance of Volume Patterns
Volume provides easy
to read information regarding the liquidity for a stock at a particular time.
Falling volume often precedes the slip-slide action when price falls not due to
profit taking or selling short, but simply because there are insufficient
buyers at the time to sustain price.
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The Securities and
Exchange Commission SEC had a pilot program to test wider spreads on thousands
of stocks to see if the wider spread would provide more liquidity, and mostly
small cap stocks benefited.
Big blue chip stocks
can suffer also from very low liquidity at times, which can create anomalies
and alter short-term runs often surprising the Retail Trader who is expecting a
run to continue moving upward.
Buy Side Institutions
influence on price and volume is due to their accumulation over time
and their bulk of volume activity. However when there is uncertainty, these giant
Mutual and Pension Funds investors will cease their buying and wait. They can
be patient for extended periods of time, sitting on the sidelines waiting to
see how the other Market Participant Groups like the Professional Traders,
Smaller Funds, and Retail Traders behave towards buying or selling a stock.
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Buy Side Institutions
use custom routing with Alternative Trading System venues creating Dark Pools.
This keeps their activity hidden to lessen the risk of moving a stock price due
to their liquidity draws, which can be significant. However the retail crowd
tends to move price with higher volatile price action. See the chart example
below.
The slip-slide action
on the is indicative of a lack of Dark Pool Buy Side Institutions interest in
this stock at this time. If this persists the risk of a High Frequency Trader
trigger to the downside is likely to increase.
Summary
Stocks require rising
volume to sustain runs, but stocks can fall easily on a lack of volume. This is
one reason why volume indicators are important to incorporate into your
analysis, as well as your favorite price and time indicators.
Experienced traders
go to the Learning Center and watch a wide variety of training webinars
including Bollinger Bands, How to Improve MACD, and Technical Analysis.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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