Lecture 6 (momentum & volume indicators) (20% of final from this lecture) Flashcards
What does volume represent in shares?
It is the amount of shares or contracts traded over a period
How is volume portrayed (displayed)?
Vertical bar below price chart
How is volume used in price?
Volume is used to confirm price, meaning volume is secondary to price analysis
How should high volume move when comparing it to the trend?
Volume should move in the direction of the trend
If volume is not moving with the trend, what may it warn you of?
Warning of impending trend reversal
What does exceptionally high volume signal?
Signals an important change
What are two characteristics of volume as price RISES (uptrend)?
1) volume increasing is confirming
2) if volume is decreasing, may put uptrend in question
What are two characteristics of volume as price DECLINES (downtrend)?
1) volume increasing is confirming (lower price = more sells)
2) if volume is decreasing, may put downtrend in question
What is the potential signal if price advance halts at high volume?
It is a potential top
What is the potential signal if price advance halts at high volume?
It is a potential bottom
What does volume display?
Volume displays the intensity of a move in price
What are the other 2 methods for analyzing volume confirmation?
1) volume indexes
2) volume related oscillators
What are volume indexes, give 5 characteristics
1) indexes are compromised of cumulative sims of data measuring supply and demand over time, rather than at a specific period
2) they do not have an upper and lower bound
3) the level of the index is irrelevant, it shows absolute changes
4) compare price with index looking for differences between highs and lows in each
5) can utilize trend lines, sometimes pattern analysis
When are volume indexes more useful?
In trending markets
What is “on balance volume”?
Cumulative index of plus or minus volume days based on change of closing prices
How is on balance volume calculated?
-if price close is higher than previous day, add the day’s volume
-if price close is lower than previous day, deduct the day’s volume
How do you use on balance volume (OBV) when high volume should confirm price trend
Compare price to OBV
-if prices reaches a new high, confirmation of price strength comes from OBV hitting a new high
What does a negative divergence between price and OBV warn
Warns of potential price reversal
What are volume related oscillators, give 3 characteristics
1) oscillate between an upper and lower bound (upper and lower vertical limits).
2) A move to high upper bound level means “overbought” conditions
3) A move to a lower bound level produces an “oversold” conditions
4) shows relative changes
5) used for divergence (differences) analysis, trend lines, sometimes pattern analysis
When are volume RELATED oscillators more useful?
Useful for trading ranges
What is a volume oscillator?
Is a ratio between two moving averages of volume and is used to determine when volume is expanding or contracting
What does expanding volume in volume oscillator represent?
Implies strength in the trend
What does contracting volume in volume oscillator represent?
Implies weakness in the trend
When is volume oscillator useful for?
Confirming the trend and for giving advanced warning in a trading range of direction for the next breakout