Saturday, October 12, 2013

The importance of trends & volume

Volume is an important indicator in a chart. Many people look at the price without paying any attention to the volume. This is a grave error.

A chart without volume is close to being useless. Volume signifies interest. Thus, the more volume transacted the more interest and more people being involved. This is a logical assumption. 

Buyers want to buy as low as possible while sellers want to sell as high as possible.
Sometimes there is wide spread between the two. 

When a buyer is  eager to buy, but finds that sellers are not willing to sell at a certain price, he will bid at a higher price.

The higher price will entice the sellers and some will sell. If the buyer wants to buy more but sellers have dried up, he will bid a little higher again. This process will continue until his wants are satisfied. This is how we can have an uptrend.

On the other side of the coin, a seller with a large stock wants to liquidate his position, but finds that his order has no buyers. So he lowers his price. The lower price will bring in some buyers. The price will keep on coming down as long as he is more eager to sell than the buyers are eager to buy. So here is how we have a downtrend.

When you want to buy a stock and find that the stock is in a downtrend, don't be impatient. Wait and watch closely. Wait until the downtrend has abated. When a downtrend has abated, it does not mean that an uptrend has begun. The stock can go into a side trend that may continue for a long time before a new trend develops. This new trend can either be up or down. You only buy when the new trend is up. If you have studied Japanese Candlestick, this will help you immensely to determine whether the trend has reversed.

So, when is it a good time to enter a trade? Here are some recommendations:

1. Buy at major support. (A major support is an important historic low.)

2. Buy at the beginning of an uptrend after a prolonged downtrend.

3. Buy when the stock is very much undervalued. Benjamin Graham said, "Buy dollar notes for 50 sen a piece."

4. Buy in a panic sale and sell in a panic buy.

5. The doji is an important candle. If you see one after a long downtrend, it the time to buy, and if you see one at the top after a long uptrend, it the time to sell. If you have no idea what a doji is, find it out at

Good luck, and Happy Trading.

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