Welcome to The Stock Market Millionaire Podcast, episode number 29, Technical Analysis of The Financial Markets Using Volume. All right, ladies and gentlemen, welcome here today. I hope you’all having a great day. I wanna talk about volume.
When you look at trading, what does volume help us understand? Basically, it’s a popularity tool. What does that mean, Rob? Well, volume tells me how many people are actually trading or purchasing, buying, selling that position. Well, all right. So why is that a big deal? Think about it this way. What if… You like to go to parties? I love to go to parties. How many of you like to be the only person at the party? Probably not a lot of you unless you like pity parties,. So a popularity contest. I really wanna have more people at the party for that party to be fun, for me to really want to even go.
If somebody said “we’re having a party and inviting two people.” Mm I’m probably not one of the two people, don’t call me. Okay? I’m not interested. Volume helps us to understand that there’s enough interest in that position that we say, “yes, I wanna take advantage of this trade, of this stock, of this option, of this future, forex, bond,” – It doesn’t matter. How much volume is out there in stock is the number of shares that are traded?
Now, is volume one of your top technical indicators?
It’s a question I get all the time. And the answer is yes, but you have to understand how volume comes into play. For me, volume starts off before I ever even consider, “do I want to trade Apple or Microsoft or whomever it is?” It comes in even before that. I wanna see on a stock that I’m interested in trading, whether it’s the stock or the options, and I primarily trade the options unless I am doing things like covered calls. But on the stock, I wanna see at least a million shares of stock traded.
That’s a lot of shares. You know what? 20 years ago, you know, back in 1997 when I started, that was a lot of shares. Today that’s not a lot of shares. You’ve got stocks that become IPOs today that are trading 10, 20 million shares in a day. A million shares is not a lot, but for me, it’s an extremely important number. Remember that popularity contest?
I want to know that there are other people out there trading it, and it’s more than just, “I want to hang out with the popular crowd.” That’s not it. It’s, “I don’t wanna have to dance with the market maker,” trying to negotiate price or something cause there’s very low volume and really no one interested in trading that vehicle. So that to me is a, a huge component of the why when it comes to volume. And I use it as the start of looking at a candidate before I even consider trading it.
When I am in that trade, I look for trends in a volume. In other words, is the volume spiking up? Is volume dropping off? Is it level? And I’ll do that on a daily chart. I also look at it on a five minute chart or one minute chart. I’m looking at opportunities to enter into a trade and I trade off of a five minute candle for my intraday type trades, whether it’s swing day, it doesn’t matter. Swing, trade day trade, it doesn’t matter. I trade off that five minute candle. And what I’m looking for is are, is volumes starting to peak?
Well, here’s a great example. Stock is running on a five minute candle, but the volume is dropping off. What is that telling me? Stock prices going up volumes going down. It means traders are not support that bullish move and stocks tend to revert back to the direction of volume. It’s not a 100% guarantee it happens all the time, but majority of the times, that’s exactly what we’re looking at is we kinda roll back over.
For me, I love using volume just that way. Can I find divergences stock is going up volumes going down or stock is going down, volumes going up, right? If the stock is dropping and volumes going up, you’ve gotta ask yourself,” what does that mean from the market in relation to a trader?” And what it says is the market is looking at this and saying, “all right, the stock is dropping, and if we’re increasing the volume, that means traders are supporting the move down.”
Whether they’re selling their positions, that’s supporting the move, or buying positions like puts, right, to move that stock into that, that direction if I’m trading put options, right? I’m looking at volume increasing. There’s just support of that overall move. So the best way for me, two ways, is to identify candidates, to even put on my list. That’s kind of big picture. From there, I look at the intraday moves of volume, along with the daily volume direction, just to see if we have spikes, peaks, divergence, things like that in there.
I get asked all the time, “well, what are your special settings that you use on volume, Rob?” Well, volume itself doesn’t have a setting! Volume is volume, but there is an indicator that I overlay on top of volume. When I look at volume, I am looking at a 21 period. Now some will call it a 21 day, but that is if I’m using it on a daily chart, but I am putting a 21 period moving average and I’m using it as simple moving average, right? Simple says what? Simple Simon says, “touch your toes!” . So what does simple mean? Simple means if you look at the last 21 days, we equally weight all 21 bars, add up those 21 days of volume divided by 21, and we plot a point on the chart. That’s volume with a simple moving average.
Well, if we have an exponential moving average on top of it, we put more weight on today, a little bit less on yesterday, a little bit less the day before, and it’s an exponential, we put exponentially more weight on what’s happening right now than we did 21 days ago or 55 days ago or 200 days ago. Right? Usually for a matter of fact, when you’re looking at the moving averages on shorter term intraday, you’re more in tail or more inclined to use a, an exponential moving average.
If you’re looking at very long term, they tend to be simple moving averages. When I look at volume, I use a simple moving average on that because I don’t wanna wait more into today versus yesterday. I am not looking for, on my big picture, I’m not looking for a spike, right? I’m not looking for, Ooh, it’s up. I can visually see that. I’m looking for what does volume normally do every day on this not weighted mostly to today. I wanna see what’s going on overall.
So also I get asked, are there other technical indicators used with volume? And the answer is yes or no, or maybe. Can there be? Absolutely. Should there be? Probably. Does there have to be, is there a law? Do you go to jail if you get caught? No, of course not. But should you add other indicators? Yes. Volume to me is a primary, again, for finding my candidates. It’s a primary on my intraday. Moving averages are primary for me. Wilder’s Average True Range is a primary for me.
After that everything becomes secondary and possibly even tertiary indicators. I use ADX with DMI plus and minus, that would be more of a secondary indicator. And then I use CCI, which is the commodity channel index. I use that and it’s more of a tertiary indicator. The only thing I use CCI for, personally, is extreme overbought and extreme oversold positions. Other than that, no. So can volume be used as a standalone? It can, but it’s good to have other primaries there that will help you to identify or confirm what you see.
For me, most importantly, the one I didn’t bring up, the one that to the, almost to the point that, unless you’re a brand new watching me here on this channel or listening to me on this channel, you know, that what’s most important to me is come on. You can say it. No, say it. Go ahead. Right! Fibonacci! Fibs are extremely important to me It’s a great indicator set. I love it. I use it all the time. It’s a primary indicator for me on top of what I do with my volume. Now, are there times that I don’t use it and it meaning volume?
The answer is no. It’s on every chart that I look at one minute, five minute. It doesn’t matter. I’ve got volume on there. I want to know what’s happening. Now, I may not use it to make a decision, but I wanna be able to see it. Visually, if it’s there, my eyes are gonna see it. A brain is trained to pick up on what it sees. It may not try to analyze everything on that chart every time, but it’s kind of the . You know, you’re walking in your house, you go past the refrigerator and you see the refrigerator light on in the refrigerator, or the door is just kind of cracked open a little bit. You’re not looking for an open refrigerator door, but your brain saw it. Same thing when it comes to volume, my brain sees it. Whether I use it or not is a totally different story.
And then when you look again at the other technical indicators, folks, you could use any technical indicator that you choose. It’s really up to you. Can you use an RSI, Stochastics, a MACD, Bollinger Bands, a parabolic SAR? Can I use ’em all together? Can I build my own? And the answer is, yes, you’re not relegated to the system and the indicators that I use, but these are what work well for me. One of the coaches here at Wealth Builders, Brandon Wendell, he’s in an amazing trader, phenomenal coach, and he uses RSI and he uses different settings than the average person does. Ironically, I’ve used the same settings years ago on RSI, but I don’t have the same successes with it. And I think it’s more for me just not trusting in the indicator, where Brandon is built out his system, he trusts it explicit. He has no question when that indicator fires, he knows exactly what he’s going to do. And that’s when, what I do when it comes to things like Fibonacci and moving averages, I know exactly what I’m going to do. So it’s just a matter of getting comfortable with the indicator set that you are looking to use.
With that ladies and gentlemen, there, you have it, make it a profitable day. Stay focused on the quest of becoming a great trader. Keep crushing it. And remember, you’re just one trade away, take care, and I’ll see you at our next update. Bye for now.