Big movers on little volume

Discussion in 'Technical Analysis' started by pasha, Oct 21, 2005.

  1. pasha

    pasha Active Member

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    I'm using Amibroker and daily data from Yahoo groups. Found lots of stocks that have made big moves, up and down.
    The problem is that the volume shows like 50(?). Is it safe to buy such stocks?
    At the time of selling there may be nobody willing to buy. :eek:
    Have heard quite a few stories of people getting stuck after buying such stocks so what is it really like?
    Please share your experiences.
     
  2. Traderji

    Traderji Super Moderator

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    It is NOT SAFE to trade in LOW VOLUME STOCKS!

    IN Technical Analysis IF PRICE is KING, VOLUME is QUEEN!

    Stock Volume is the daily number of shares of a security that change hands between a buyer and a seller.

    Volume is a trader's second best friend (afterall Trend is the first best friend of any trader!!).

    Volume offers a complete picture of the market.

    Volume can help determine the health of an existing trend.

    Specialty volume for indexes and volume-based technical analysis are very good indicators for predicting index shifts.

    Volume is the indication of supply and demand. It's defined as the number of units traded during a time period. This number is significant in that it supports the prevailing price trend.

    The technical analysis of volume is a basic yet very important element of market timing strategy. Volume provides clues as to the intensity of a given price movement.

    Minute-by-minute trading volume shows the reversal points of the market, and therefore when to buy and sell!

    Currently when a change in sentiment occurs in the market, most people don’t find out until it is too late. This can be costly to an investor. Trading volume offers investors an invaluable tool to know when and where a change in sentiment is going to occur, and act accordingly.

    Intraday volume helps you see where a stock is being repeatedly bought as it dips. Likewise, towards the end of a rally, a wide volume spike often signals that the move is at an end, at least short-term. If you weren't aware of it before, you should be starting to see why volume is a trader's best friend.

    Additionally, unlike many indicators, volume is applicable to every timeframe. How can this be? Simple: volume is a measure of sentiment. Fortunately for us, human nature is the one ever-present constant of the stock market. Never forget that fact. Once you have your own emotions under control as a trader, knowledge of this profound fact will guide you ever after as reliably as the Northern Star guides a lone sailor across a vast sea. Now you should really be starting to see why volume is a trader's best friend.
     
  3. nkpanjiyar

    nkpanjiyar Member

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    Very nice elicitation Traderji as always.

    Thanks,
    nkpanjiyar
     
  4. AMITBE

    AMITBE Well-Known Member

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    Dear Traderji, as always your writing is outstanding for the lucidity of both style and content.
    I have another volume related issue to discuss for a wider understanding:

    A) How is volume different from liquidity on a trading basis.
    And
    B) How does one deal with certain counters that show strong movement in either direction on low volume/liquidity. A few examples are Madras Cement, Financial Technologies and Infotech Enterprises. As I hold position in these and track daily, I see them trading their trends firmly on meagre volume and with minimal volatility, almost always.

    Look forward to your elucidation.
    Thanks.
     
  5. vince

    vince Active Member

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    Price is king , Volume is queen and you Traderji are an Ace. Truly a guiding light for us.
     
  6. Traderji

    Traderji Super Moderator

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    The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash.

    An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash.

    A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices.

    An asset is said to be liquid if the market for that asset is liquid.

    The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash. An asset is liquid if it can easily be converted to cash.

    The three components of market liquidity:

    1) tightness is the bid-ask spread;

    2) depth is the volume of transactions necessary to move prices;

    3) resiliency is the speed with which prices return to equilibrium following a large trade.

    It is always safer to invest in liquid assets than illiquid ones because it is easier for you to get your money out of the investment.

    Therefore liquidity is:

    1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.

    2. The ability to convert an asset to cash quickly.
     
  7. Traderji

    Traderji Super Moderator

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    If you trade small quantities it should not matter. However if you trade in large quantities of stocks then it is better to avoid trading in illiquid stocks. In a rising market most stocks move in the general market trend.
     
  8. nkpanjiyar

    nkpanjiyar Member

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    Fabulous Traderji. Excellent. Your posts are GEM.

    Thanks,
    nkpanjiyar
     
  9. AMITBE

    AMITBE Well-Known Member

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    Hello Traderji,
    Thanks very much again for a most articulate response to my query.
    Always look forward to your teachings.
    Regards.
     
  10. pasha

    pasha Active Member

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    Thanks, Traderji. One more question.
    When the volume is so low, how are these stocks doubling and tripling in value and there is no trading during the day? Every day the stock gaps up.:confused:
     

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