Friday, December 13, 2013

Technitrader Weekly Stock Analysis: “The Most Important Stock Indicator”

MetaStock® SPRS Series - Week 149 –December 13, 2013 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT
Often traders will ask what indicator is the most important for stock trading. Regardless of whether you are an intraday trader, swing trader, position trader, intermediate term or long term investor the most important stock indicator is not MACD, it is not Stochastic, or any other price indicator.
The most important indicator is Volume.  Candlesticks are your most important price indicator, however candlesticks do not complete the chart analysis which is a crucial aspect of successful trading.
There are 3 data that come from the market:
Price is represented on the chart by the candlesticks, time is represented by the chart timeframe, and quantity is represented first by volume bars.
Volume bars are often the least used and least understood of the 5 essential indicators for optimal consistent success trading stocks. Volume leads price in most instances in our modern markets, and that leading quality is what makes volume so important to all types of trading.
Quantity the data stream has 2 primary types.  The total number of shares traded at that time whether it is a millisecond or a year, the total number of shares is usually represented by volume bars. Quantity also refers to the number of shares per transaction. This becomes imperative when traders need to track the institutional activity.
Today the discussion is about volume bars.
Volume bars should be represented on your charting software with green bars for up days and red bars for down days.  If you use a solid color such as blue and do not differentiate up or down days, your analysis will be impaired and will take much longer.  Coloring the volume bars provides exceptional analysis easily and quickly.
Each volume bar on a daily chart represents the total number of shares that traded hands that day, therefore one side of the trade not both are represented in the volume bar. Also if you use daily charts and analyze end of day volume, then you are analyzing the CONSOLIDATED tape volume. This volume differs from intraday as it includes all volume from every trading platform and venue, not just the exchange volumes. ATS Dark Pools, ECNs, Regional exchanges all must report their data, and this is called the consolidated tape which includes the total volume from all sources.
Having the total consolidated volume is an important part of making sure your stock chart analysis for selecting stocks is correct. With the consolidated volume provided at the end of the day from your charting software, you can quickly go through stocks with the basic criteria of at least 100,000 shares traded per day average.
There are many stocks that are illiquid stocks. What this means is there are so few shares traded per day that buying the stock can be very risky.  Without sufficient volume, there is a lack of interest by the market participants and this can lead to weak picks, poor trading profits, or even losses.
Always make sure that you check the volume for any stock you trade. Be aware that the green and red bars represent the total number of shares traded that day, and all of the volume is applied either to the upside if the stock moved up from the prior day’s price level, or all of the volume is red and applied to the downside as price moved down that day.
WCPS is an example of an illiquid stock, see chart below.
There is insufficient volume for this stock to move up or down and provide good trading profits.  The illiquidity also skews any indicator you might apply to the stock, and the lack of volume makes the price action extremely volatile and unreliable. Avoid trading stocks that are illiquid. To determine if the stock has sufficient liquidity always study volume bars first before checking any other indicators.
Go to for more information on Stock Indicators.
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
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