High Volume Trades And Price Breakouts

Most expert investors of the stock exchange understand the importance of volume. They know that there times when price doesn’t give you much knowledge of the upcoming events in the stock market unless you consider volume. It wouldn’t be wrong to say that stock market can befool you at times. What you might think as an upcoming and permanent upward movement in price might end up as being a fake price breakout. Investing at these instances could become the foundation of a losing bet. Here’s some information about price breakouts and high volume trading.

Price Breakouts

There are levels of price of a particular stock that buyers and sellers are not easily able to break. There is a highest price level of that stock and the lowest price level. The stock continues to move between these two price levels but rarely does it go beyond these levels. The top level, which can also be referred to as roof of the price, is called the resistance. The bottom level, which can also be called the floor of the price level, is named as support. When you look at a graph and see that the price has gone past the support and resistance levels, it will be called price breakout.

False Price Breakouts

Here’s where the things can get a bit tricky. When you look at the price chart of a particular stock you will see many instances where the price breaks through the resistance and support levels. However, you will notice that price quickly comes back to its normal levels after breaking out for only a short period. This can happen in both cases i.e. when price breaks out at the bottom or top. This sudden breakout and then reversion back to normal is named as false breakout and basing your strategies on this can be extremely harmful.

Use Volume To Hedge The Dangers

When you are trying to figure out whether a breakout is real or fake, you have to use volume as your tool. Here, you have to notice the volume of trade taking place when the price has broken out of the support or resistance level. If the volume is still high when the price has crossed its breakout level, it is a reliable indication that a real breakout has taken place and you can base your future move on it. However, you will not make a move and consider the breakout real if the volume is low. Low volume shows lack of interest and the price will definitely reverse in order to develop the interest of either buyers or sellers.

In short, you will have to keep an eye on the volume of trades for that particular stock on previous days. If the volume is much higher than the average of each day’s volume, the breakout is real and you can benefit from it.

Lastly, make sure to use the many different types of indicators in order to keep a check of the volume of trade in the market. Some extremely useful volume indicators are VWAP, CMF (Chaikin Money Flow) and OBV (On Balance Volume).