Thursday, January 23, 2014

TechniTrader Weekly Stock Discussion for MetaStock: “Why Volume Indicators are more important than Price Indicators for Stock Chart Analysis”

MetaStock® SPRS Series - Week 155 – January 24, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Books and articles written for the retail trader or investor adamantly insist that price is the most important indicator.  This leads to a serious misunderstanding as to what that statement really means for stock chart analysis. Yes, price is the most important indicator as it reflects the current perceived value of that stock and its company at that particular moment in time, based on the market participant groups that are buying and selling it at that time.
However what is missing in this analysis is that there are 9 Market Participant Groups. During any period of time or “snap shot moment” of price action whether it is on the millisecond scale or a daily chart, not every Market Participant Groups is actively buying or selling.  Some are simply holding the stock, OR waiting for the stock to move to a certain price point before they buy or sell.
What matters most in the automated market is which Market Participant Group or Groups are currently controlling price as you, a retail investor or retail trader are about to buy or sell that same stock.  Volume at that moment tells you far more about what price is likely to do next, than any price aka candlestick pattern will reveal.
For example:  
In the chart below a classic downside candlestick pattern called a “Broken Step” by itself indicates more downside action.  Traders only using price and price indicators would react by moving in to sell short this stock, because everything based purely on price action points to more downside potential.

Now let’s study the chart with two powerful, easy to use and learn volume and quantity indicators. First of all, the Hybrid Volume Bar indicator clearly shows a lack of momentum energy for the downside action.  If this was a dominant sell short pattern, the Hybrid Volume bars would rise above the Exponential Moving Average.  The downside volume is well below the average lines.
Secondly, the Hybrid Indicator Balance Of Power BOP shows clearly that Giant and Large Lot Market Participants had been quietly accumulating this stock prior to the momentum moves up. The momentum aka volume and price action, show High Frequency Trading HFT volume patterns that are impossible to distinguish just from price.
In other words, price by itself fails to expose the following two critical aspects of this price action:
  1. Dark Pool activity that has continued
  2. High Frequency Trader activity that was the propulsion for the upward action
Understanding that these two powerful Market Participant Groups are controlling price in different time frames is vital information for both the retail investor and the retail trader.

The analysis of volume and quantity with price, clearly warns that this is not a stock to sell short. It is merely in a brief profit taking mode.

Price after the broken step pauses in a classic resting day pattern, for a stock in profit taking mode by High Frequency Traders and pro traders.  Then it has a classic reversal pattern which is followed by a short run up, then more Dark Pool buying, and then another run upward.  Selling short could have cost a retail trader a significant loss, and selling this stock would have taken a position or long term investor out of a stock that has plenty of upside potential left.
Retail investors and retail traders often lack a complete education and the training, necessary to transform the information they have at hand into working knowledge and a trading process. Strategies are not enough information to be successful. Unfortunately most retail traders only learn strategies and are never taught the professional style processes that make pros successful, while retail traders struggle to break even at best.
Yes, price is important but without a good depth of education and knowledge on how to use volume as well, you are missing 50% of the analysis necessary to be successful in trading stocks, options, e-minis, Exchange Traded Funds ETFS, and other trading instruments.
Incorporating volume indicators is not just a necessity it is an imperative requirement for successful retail trading in our modern electronic marketplace, where 9 distinct Market Participant Groups trade.
For additional information and to view a TechniTrader video titled “Stock Indicators” go to:
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
For additional training visit
This Stock Discussion and Training Lesson is sponsored by
MetaStock® Partner

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