Volume: Always Second to Price
Volume analysis can supply us with important information regarding the conviction of the buyers and sellers in a market, but it is important to remember that it comes second to price, as in the end price is the only thing that pays.
There are many instances where a stock will rally on lower-than-average volume, and many participants, afraid a low-volume move will not be sustained, will distrust the move and miss out. Decisions to buy and sell should be based on price action first. If the volume does not expand in the direction of the trend as you would expect, consider reducing your risk by selling off a piece of your position and keeping a tight stop on the balance. Whatever you do, do not fight a trend because of volume concerns. Volume will often follow price as more participants are motivated by the emerging trend activity to take action, and fighting the trend can become very costly.
Understand the healthy relationship of the volume expansions in the direction of the primary trend as compared to the diminished volume on the counter-trend moves. This relationship shows conviction in the direction of the primary trend followed by a lack of opposition as the stock consolidates, which increases the likelihood of a trend continuation.
Know that liquidity for a stock is not a constant even when the average daily volume reaches millions of shares. Liquidity is impacted by a long litany of factors such as time of year; time of day; times surrounding corporate events such as earnings, new product developments; and, of course, technical events such as breaking past a key level of support or resistance. Trading volume outside of the normal hours (9:30-4:00 pm EST) tends to be very choppy and is best left to only the most experienced and disciplined traders.
Low-volume times of the year don’t necessarily mean avoiding the markets as some believe. One of my favorite times of year to trade is the last two weeks of the year. It seems as though the market becomes more predictable without the influence of the larger program trades. The moves in the more speculative names seem to be left “unchecked” and allowed to run. Be sure to understand the factors that affect the liquidity of the market overall and more importantly, the stocks you are trading, to minimize the impact of your order to the market.
This is a short excerpt from MY BOOK