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Old 08-28-2012, 10:45 AM   Nav to Top  #1
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Lightbulb Average Daily Volume and Investor’s Business Daily by Antichartjunk

August 28, 2012:

"I have been asked several times recently how I follow a stock’s daily volume. Before I answer that, I would like to point out that it is important to follow a stock’s daily volume and then compare that to it’s average daily volume. You will find that buying quality stocks (in a quality market of course) as close to the initial pivot point in the buying range when that same stock is experiencing a significant increase in average daily volume will improve your edge. Investor’s Business Daily suggests using a 40% increase as the threshold for a significant increase in volume. This is the measure that you will routinely see that I use on StockTwits and Twitter.

Experienced traders know that this is not always that simple. There are situations where a stock’s average daily volume for a portion of the day is significant which could reasonably trigger a purchase, but then post-purchase the volume for the rest of the day plummets and ultimately the daily volume ends up average or below average. When this occurs, do not just immediately sell as soon as possible, but keep in mind that the breakout did not occur on significant volume, and lower risk by tightening the stop to a level above your typical stop selling rule. Due to this occurrence some traders will choose to just observe the breakout for the day (a breakout is still a breakout despite volume) and for days to follow to see how the stock performs, perhaps waiting for the stock to consolidate a bit and then choosing to buy after the initial breakout if the stock has demonstrated a significant increase in daily volume on or since the breakout. This obviously is at the risk that the stock continues to move upward, becomes too extended to purchase (do not still buy here!), and despite the trader observing the breakout, the trade is missed.

There is also the situation when a stock’s volume remains significant throughout the day and it appears to be a solid breakout. Then, however by day’s end the price of the stock falls below the initial pivot point of the buying range. Similar to the last situation, do not just immediately sell as soon as possible, but raise your typical stop, perhaps more so than the previous example, because the stock demonstrated some form of institutional selling. It is probably best to be flexible enough to choose what to do on a case by case basis, depending on the stock, the overall market, how significant the volume, time of the day, etc. Further, there may be rare situations where I will knowingly purchase a stock with above average volume but not necessarily above the 40% threshold on the day of the breakout. This most recently occurred in AAPL around Weeks 30-32 when other factors were weighed such as AAPL’s bounce from the 50-day with increase volume previously on July 31st, continued leadership, etc.

So how do I track daily volume? It is quite simple. The antichartjunk weekly watchlist includes tags at the bottom of all the stocks for the week. At the beginning of the week, I will copy and paste that list into IBD’s “My Stock Lists” feature. This feature includes a valuable statistic known as “Volume % Chg.” which is a measure of the day’s volume relative to the average daily volume. Further, the tool compensates for the time of day by “prorating” the volume. As you use the tool you will begin to note several patterns based on overall market activity, such as within the first 30 minutes of the trading day there is often wild buying and selling and therefore high volumes, so it is common to observe a stock’s volume in the hundreds of percent at the beginning of the day to then observe a drop to below average volume at some point during the day. You can also use this tool to create additional lists, such as your current holdings, which will assist you in following your sell rules. If your watchlist is large enough, say over 25-30 stocks, the tool can also be useful by sorting by volume % change, which permits you to just focus on the stocks with significant volume and ignoring the rest, just for the day though. There are certainly trading platforms that enable you to customize by adding an average daily volume statistic, but many traders find constantly observing 25+ charts much more difficult than IBD’s sortable table.

Here is this week’s list and IBD, if you would like to try this out:

“Chartjunk refers to all visual elements in charts and graphs that are not necessary to comprehend the information represented on the graph, or that distract the viewer from this information.“- as defined by Wikipedia and Edward R. Tufte



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