Yesterday the total volume traded for T H Plantation was 2.6 million shares, while its daily average traded is only about 200,000 shares. The share price traded between Rm 2.03-2.05 and closed at Rm 2.04, up one sen.
In my previous article I posted on 27th March 2014 with a title ‘Best Time to buy Plantation Shares’. My main reason for writing the article was to alert readers that due to the recent price increase of CPO, almost all plantation companies will be able to make additional profit which is the strongest catalyst for pushing share prices up.
In that article, I stated that I was buying TH Plantation among a few other plantation shares I was buying. This exceedingly high volume traded attracted my attention.
The Computer can tell you everything you want to know
As I am only a novice in technical analysis, I have to find out the importance of volume in predicting price movement in order to write this article. So I found out from the computer which can tell you everything you want to know.
The two methods commonly used to analyze securities and make investment decisions are fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn’t care one bit about the “value” of a company. Chartists are only interested in the price movements in the market.
Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.
While price is the primary item of concern in technical analysis, volume is also extremely important.
What is Volume?
Volume is simply the number of shares traded in one day. The higher the volume is the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.
Why Volume is Important
Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story.
Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end.
Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we’ll describe in more detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened.
Volume Precedes Price
Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.