Buying and selling the same stocks
as institutional traders, there's
one way to try to increase in trading success.
While identifying trends can help you find these stocks,
sometimes it helps to look at volume, too.
Volume is the number of shares traded on a particular day
and can provide further evidence of institutional buying
or selling.
Let's look at how to combine trend and volume.
Also, I'll show you a tool in PaperMoney, the On Balance
Volume Indicator or OBV.
First, let's look at a bullish example,
where volume increased during an uptrend.
For this example, we'll look at a one-year daily bar
chart of amazon.com.
The volume is in the pane on the bottom of the chart.
Each column represents a day.
In January 2015, Amazon made a positive earnings announcement.
The good news caused an influx of demand,
resulting in many buy orders.
This is reflected in a volume spike and a price gap.
Gaps happen when price makes a big move since the last price
with no trading in between.
In this case, the price gapped up
to find enough supply to fill the demand.
Price continued to rally, resulting in a new high.
Eventually buying slowed and the stock pulled back.
Volume returned to normal and price created a new higher low.
The stock created new higher highs and higher lows
through July.
Throughout the trend, notice how a volume spike
accompanied each rally.
Increased volume on the rally suggests institutions
are buying the stock.
Let's see what happens to volume in a bearish example.
Suncorp Energy Inc. Created lower highs and lower lows
from June to August of 2014.
Now let's look at volume.
If you compare the summer months to the fall months,
you see volume picked up through September and October.
To show what was happening to price, I'll draw a trend line.
This increased selling caused the stock to fall more quickly.
As we move forward, we can see that similar selling took place
in November and December.
The higher volume and the faster price selloff
likely shows where more institutions started selling.
This is another example of how combining volume and price
can help you see where institutions
are putting their money.
When it comes to analyzing volume,
there are a couple of things to keep in mind.
First, downtrends are commonly faster than uptrends.
In fact, it's been said that stocks take the stairs going up
and the window going down.
You saw this in the previous example.
Therefore, you should consider ways
to protect your investments.
Second, sometimes high volume stocks
don't show large volume spikes.
This makes it difficult to tell where institutions
may be putting their money.
A stock like Apple trades 63 million shares per day.
Compare that to Amazon's four million shares per day.
To cause a spike in Apple, a lot of institutions
would need to be trading the stock.
The spike will still happen, but just not as often.
However, there are charting indicators like the OBV
to help you spot volume strength with the trend.
It measures the volume on up and down
days to see where the trend strength is.
First, also you have to add the indicator.
Then we'll talk through how it works.
For this example, let's use Alphabet.
I'll type G-O-O-G-L in the search field and hit Enter.
Now I'll add the OBV by clicking the Edit Studies button.
Next, I'll scroll down to On Balance Volume and select it.
Now I'll click Add Selected.
OBV works best if it's visually overlapping price
because it helps you identify the trend and its strength.
By placing them side by side, you have an easy comparison.
So I'm going to move the study over the price.
This is done by placing the mouse over the On Balance
Volume pane and clicking the up arrow until it's
in the price pane like this.
Finally, I'll click OK.
Here's what to consider.
When volume is confirming an uptrend,
the OBV line will uptrend at a greater rate than the stock
price.
When volume is confirming a downtrend,
the OBV line will downtrend at a greater rate than the price.
Alphabet traded sideways for much of 2014 and 2015.
When we look at the volume pane, there
is hardly any discernible difference
in the volume for Alphabet in 2015.
However, we can see that in January of 2015,
the OBV uptrended faster than the stock price.
This signaled that institutions were likely
accumulating shares.
For traders using this tool, the July breakout
may not have been a surprise.
Uptrends identify stocks and demand.
Combining trend with volume provides more evidence
when attempting to identify which stocks institutions may
be buying.