Halal Investment Series Part 8
Looking at volume patterns over time can help you get a sense of the strength of conviction behind specific stock and market advances and declines. The same is true for options traders, as trading volume is a good indicator of how popular an option is right now. Volume, in fact, plays an important role in technical analysis and is prominently featured among some key technical indicators.
Trend Validation
Volume should increase in a rising market. Buyers must increase in number and enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume may indicate a lack of interest, indicating a potential reversal. This can be difficult to grasp, but the simple fact is that a price drop (or rise) on low volume is not a strong signal. A price drop (or rise) on high volume is a stronger indicator that something fundamentally changed in the stock
Volume and Exhaustion Moves
We can see exhaustion moves in either a rising or falling market. These are generally sharp price moves accompanied by a sharp increase in volume, indicating the potential end of a trend. Participants who waited and are afraid of missing out on more of the move rush in at market tops, depleting the pool of buyers.
Falling prices eventually force out a large number of traders at a market bottom, resulting in increased volatility and volume. In these situations, we will see a decrease in volume after the spike, but how volume continues to play out over the next days, weeks, and months can be analyzed using the other volume guidelines.
Positive Signs
Volume can help you spot bullish signals. Consider a price decline with increased volume, followed by a price increase, followed by a price decline, followed by a price increase, followed by a price decline, followed by a price decline, followed by a price decline, followed by a price decline, followed If the price does not fall below the previous low on the move back down, and volume is reduced on the second decline, this is usually interpreted as a bullish sign.
Price and Volume Reversals
Following a long price move higher or lower, if the price begins to range with little price movement and high volume, this could indicate that a reversal is underway and prices will change direction.
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