Many different investors use many different types of data to qualify a stock for purchase. If you’ve read my investing essentials series, you know a lot of the figures that I myself use. One figure however that was not listed is one that I use to determine whether or not I may be buying in at the right (or best) price. This figure that is relied on is more on the technical analysis side of analysis. What I’m referring to is one of the market itself. It’s a number so valuable that it can be seen as one of the largest indicators of what the market truly values at stock at. I’m talking about volume.
Volume can show just how many people are buying in at a certain price. Volume bars are typically found at the bottom of most stock charts or they can be enabled through a function on the side of your charts. If you pay attention to them, they can be a very useful tool for analyzing when to get in on a stock. I personally feel that it’s as close to market timing as you’re going to get or rather it’s one of the best ways to see where the majority of the market thinks the stock brings the perfect value. This is important because all of our numbers can lead to one number of value but if the market doesn’t agree with your number, your number is by most arguments inferior.
To use volume in your own analysis, simply look at the bars on the bottom of your graph and see if there is ever a day or two in the last two years that the stock saw an extremely large amount of trading. Usually there is one or two bars where they suddenly leap forward off the chart. These are bars to pay attention to as they show the volume of shares traded that day during those prices. Myself and a large group of other trades have found that this is a great item to use to predict the true value of that stock by the market. If you find the bar or two that I have referenced, next look at the following trend right after it. Did the stock suddenly bounce up or down after that day of trading? Most of the time you’ll see this bar show up when a stock price has been falling for a long time (month or more). This bar then occurs when traders in the market suddenly feel that the stock has hit its floor.
The stock may continue falling afterwards. If this happens, you know that there was an artificial floor and the market may have been relatively wrong about the true value of the stock. Or maybe a piece of information about the company was leaked that they market liked temporarily but wasn’t enough to keep the price afloat. Either way, it shows that the market was wrong. If however the stock goes up for a while after that amount, you have likely found the intrinsic value of that stock per the market’s opinion. If you can buy in as close to that day’s trading amount in the future, you’re likely buying in at a good price.
Granted, there are flaws in this way of trading. Flaws can be found in every style of trading. However, I feel that volume is an extremely strong item to watch when you have already decided that you are buying into a company that has passed your prior scrutiny of analysis. It is not to be relied on as the only figure to be traded on but it is a great item to use as the last item of review when you’re about to buy in.