Trading Volume
Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator.
With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.
Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading.
Below are some excerpts of Bob’s thoughts from a recent live session.
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How does volume impact trading?
When a stock breaks through a key resistance level, traders often look at the volume to confirm the breakout. A breakout accompanied by high volume is considered more reliable and is likely to continue in the breakout direction compared to a breakout on low volume.
An example scenario could be - a stock's been trading in a range between $50 and $55 dollars. One day the stock price closes at $56, breaking that $55 resistance. If this breakout is accompanied by significantly higher volume, then you could say it usually suggests strong buying interest and a higher likelihood that the breakout will sustain. It's not a guarantee that the breakout will sustain, but there's a higher probability and you can actually measure it.
Conversely, if the volume is low, the breakout may be less reliable, and the price may fall back into the previous range. Volume spikes can signal a potential reversal in the market.
A sudden increase in volume after a prolonged trend might indicate that the trend is losing momentum, and a reversal could be imminent. Traders may look for additional signals such as technical indicators or candlestick patterns to confirm a potential reversal.
What are the key points of trading volume?
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How important is volume as an indicator?
I'll tell you why I would put it as important. I don't use it for entries in trades. I use it for cutting my losses or taking profits and those two things are very important.
I do not exit a trade that has a spike in volume to the downside if it doesn't hit my stop. I still rely on my analysis of stop price. Why is that? Because I've charted out the risk and it's the risk that I'm okay with. The only time that changes is when I use trailing stops. If there's volume and we're approaching one of my trailing stops, for example, if it's 245 and there's a big volume and spike with a downside move toward my trailing stop, I might hit the close button just because it's close to my trailing stop anyway, but that's really the only leeway I give myself.
I think volume is important, but, in my view, it's a secondary indicator that can be very, very valuable when you're already in a trade.
How should beginner traders use volume?
For beginner traders, I would tell them to use volume for confirmation for some demo trades and see how it works. Volume only matters where it happens, not that it happens. Volume spikes can happen for any number of reasons, but volume at a point in time matters more than just volume.
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