Volume

Volume, which is another factor for a person to analyze and be aware of prior to future stock purchases. People tend to think in the herd mentality; therefore, if a move occurs with heavy volume (i.e. heavy trading taking place whether it is up or down) this would serve as a clue that it (i.e. the herd) knows something or thinks something is about to occur, or has just occurred. Paying attention to volume lets you confirm your stock trading decision on whether you should be buying or whether you should be watching and waiting for further decline in price in the security you are looking to purchase. It should be noted that there are two types of volume: positive volume and negative volume. Also keep in mind that the names are misleading. According to tradingsolutions.com, the Negative Volume Index is based on the theory that informed investors are trading on days of lower volume, while the uninformed crowd is participating on days of higher volume. This theory coincides with the Positive Volume Index, which tracks changes on higher volume days. The positive Volume Index follows the “less informed” crowd, and the Negative Volume Index follows the "smart money" crowd. Keep in mind that these two indicators are not completely polar indices. Just because the Negative Volume Index is up, does not mean the Positive Volume Index will be down; they are just designed to theoretically track dissimilar segments of the trading community.

The question might arise, “How do I use this information to make money?” According to tradingsolutions.com, The Negative Volume Index is typically compared against a one-year exponential moving average of its value. When the index increases above the Exponential Moving Average (EMA), informed investors have typically been buying this security, indicating the prices should continue to increase. When the index decreases below this value, informed investors have typically been selling, indicating a possible decline. Therefore, when studying a chart of a particular stock, if the Negative Volume Index rises above the one year Exponential Moving Average (EMA), this would be considered a buy signal opportunity; case in point, “smart money” has just entered the arena and “less informed” money chases “smart money”, possibly leading the way for an increase in stock value. One does not have to take my word for it. According to Norman G. Fosback, in "Stock Market Logic" based on back-testing against broad-market indices, a bull market (optimistic stock rally) was in progress during an upward crossing of the Negative Volume Index with the Exponential Moving Average (EMA) 96% of the time. Magee states, “The fundamental premise of technical analysis is that it is possible to identify and predict the continuations and turning points in market trends, to evaluate relative strength or weakness in the market, and to profit from the application of that analysis” (pg.4).