If we want to focus on anything, it should always be the same thing: price and volume.
For all the wealth of tools available to you, they pretty much all come from the same two sources; price and, for confirmation, volume.
Know where you’re coming from…
Traders need to understand that the technical indicators that have been created over the last 20 or 30 years all derive their results from a mix of price and volume.
Therefore, if the price is telling you one thing, and the indicator something else, then you need to give precedence to price. So, do you only look at charts from now on? Just ignore indicators?
Of course we don’t. We should use as many pieces of information as we can, or feel comfortable with, when planning and executing our strategy. And, indicators will often point to a change in trend. Divergence, when the price is indicating one thing but an indicator another, is an important part of technical analysis.
…and know where you are going…
But, at the end of the day, you make money from prices, not indicators. So focus on prices and volume – and let indicators give you a second opinion.
With price, this is obviously the defining characteristic of any shares, and it determines whether we will make money with the trade. We don’t need to over-complicate matters – technical analysis can be just as effective when it is simple.
When looking at price, we need to focus on the price action relative to its past. For example, where the price closes relative to its open, or the previous close, will tell us how the market feels about a company.
In turn, after several days or weeks of price action, the market will then appear to move in one direction or the other, or in a broadly sideways pattern, signaling whether the stock is trending or consolidating.
Volume counts too!
Volume is of key importance when looking at the market, because it instantly shows whether price action is a result of few or many buyers and sellers. This shows you the level of commitment to price action.
If the price jumps higher on very low volume, you might discount the move. However, if the price jumps higher on very high volume, this is confirmation that a greater than usual number of traders are committed to the stock.
Most importantly, a spike in volume signals a sudden change in sentiment toward a stock.
Specifically, it signals an increase in interest in a stock; investors might have become more negative or more positive, but they’ve definitely become more something.
In all, when using technical analysis, it is important to remember that core ingredients are just price and volume – and we don’t really need much more than that. Sign up for 7 days of free recommendations – click here.