Technical analysis I

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The other raw material used by technical analysts is data on the volume of shares traded on a given day.

Volume is considered significant because when a large volume of shares is traded you can be fairly sure that the price on the day is 'accurate' since it represents a consensus between many buyers and sellers.

Conversely, when the volume is low the price has been set by only a small number of individuals or organisations and may not be totally representative of the true 'value'.

For most technical analysts, volume is used as corroborative evidence of a trend rather than primary evidence. There are five basic rules:

When prices are going up and the volume is increasing then the trend will stay in force and prices will continue to rise.

When prices are going up and the volume is decreasing the trend is unlikely to continue and prices will either increase at a slower rate or start to fall.

When prices are decreasing and volume is increasing then the trend will continue and prices will fall further.

When prices are decreasing and the volume is also decreasing then the trend is unlikely to continue and the decline in prices will slow down or they will start to increase.

When volume is consistent, not rising or falling, then the effect on prices is neutral and you need to find some other way of backing up your trend analysis.

The Five Basic Rules

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