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Weekend Newsletter for June 10, 2006 Please forward to a friend! (Subscribe)
The Week At A Glance According To The Charts
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Price and Volume - Bullish or Bearish?
Price and Volume -- by Bill Kraft 
Bill Kraft
Editor |
Many of the readers already know much of my philosophy about
trading. I like to enter positions with my initial exit in mind before I
enter; I believe that money needs to be managed and trades made with
equal percentages of risk money (3% to 5%); I must be aware of and
understand the risk(s) I am taking with each trade; I must be aware of
the potential reward to risk ratio before I settle on a play; I need to
be disciplined. With Trend Trader, for example, I am always opening
positions by buying stock. That means I will only enter positions where
it looks like the stock is going to go up. Certain clues may help. For
example, have the markets been moving up, is the sector moving up, is
the stock moving up, are there any reversal signs? How can I get a
handle of what's going on overall and with any given stock?
I am basically a technical trader. For me, that means I try to base
my entries and my exits upon the chart of the stock. Sometimes, I will
select a position based completely on technicals and totally disregard
fundamentals. For example, I may see the chart on a fundamentally strong
company and realize that the stock just broke a strong support, fell
below the 200 day moving average, had a MACD crossover, etc., etc. I
probably would not hesitate to take a bearish position (like selling the
stock short or buying puts or creating a bear call spread) even though
it was a sound company. I know I could reverse to a bullish position if
the stock turned back up.
Of course, in much of my trading I do look at fundamentals and try
to find good combinations of fundamentals and technicals that provide a
potential trade.
What I'd like to explore here is the value of price and volume (in
chart form) in determining continuation of a trend and potential
reversals. If we have some basis to believe a turnaround might be in
the offing, for example, wouldn't it be a good idea to tighten stops or
wait to make entries until the issue is determined? I suggest that
price and volume can give us a whole lot of insight into what is going
on in the market, sector, and individual equity.
Take a look at the following combinations of price and volume and
ask yourself whether each is bullish or bearish. Test time!
Price Up & Volume Up
Bullish or Bearish?
Price Down & Volume Down
Bullish or Bearish?
Price Down & Volume Up
Bullish or Bearish?
Price Up & Volume Down
Bullish or Bearish?
Any problem figuring that out? Of course, when the price is up and
the volume is up, that's suggestive of bullishness. What if the price is
down and the volume is down? Or what if the price is down and the volume
is up? In my classes, students, at first may be confused by the
implications of those two combinations. If the price is down and the
volume is down, that is usually bullish. What that is saying is
although the price is down, there isn't a lot of support for a move in
that direction. If there isn't support for the move down, the
conclusion is that the combination of price down and volume down is
bullish. If there is support for the move down (price down, volume up),
that is generally a bearish signal. Finally, when the price is up and
the volume is down, that is bearish because the up move is not being
supported by volume.
I look for these combinations as I view charts of the markets,
sectors, and stocks. The information price and volume conveys can be
quite helpful in suggesting whether a trend is continuing or whether a
reversal seems to be in the offing. When I use that information, I have
at least one piece of extrinsic evidence to help me arrive at my opinion
of what the respective market, sector, and stock may do. It removes me
one step, at least, from trading on emotion. I believe the more emotion
I can remove from my trading, the better trader I'll be.
Good Trading!
Bill Kraft
SUCCESS TRADING GROUP -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or pager alerts intended to provide you with the opportunity to make many, many profitable trades.
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Details Here.
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Our Option Trading Service is for conservative traders that understand leverage pricinciples. We focus on powerful option trading strategies that place volatility and momentum in your favor. And we pride ourselves on minimizing our losses. We always know our downside potential in a trade.
Details Here.
TREND TRADER -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.
Details Here.
$10 TRADER -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Details Here.
COVERED CALL SERVICE -- by the Covered Call Team
Details Here.
* * * SCOTTRADE * * *
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