Module 5 - Volume and Open Interest
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The document discusses key concepts related to trading, particularly focusing on volume and open interest, as well as the importance of volume in technical analysis. It emphasizes that volume confirms price movements and plays a crucial role in trend determination and price pattern formations. The author also provides insights and resources for further learning about responsible trading through various platforms and future publications.
Module 5 - Volume and Open Interest
- 1. The Responsible Trader Lessons The Responsible Trader’s - POV The Responsible Trader Lessons Module 5 – Volume and Open Interest
- 2. The Responsible Trader Lessons The Responsible Trader’s - POV • The Responsible Trader's POV (Point of View). • These are my notes, my own additional research and studies on the Topic that I posted, and my personal observations and opinions that I am sharing to further enhance our knowledge and understanding. • Some of these were previously posted on “The Responsible Trader” thread, Stock Market Pilipinas (www.stockmarketpilipinas.com). This is the latest version of previous posts I made. • Some of these plus further explanations and discussions will be appearing in my forthcoming book “The Responsible Trader.” The Responsible Trader Lessons
- 3. The Responsible Trader Lessons Quick Review – In Economics 101, what do you call the Blue Line and the Orange Line? RED FOR RESISTANCE GREEN FOR SUPPORT The Responsible Trader Lessons
- 4. The Responsible Trader Lessons Quick Review – In Economics 101, what do you call the Blue Line and the Orange Line? RED FOR RESISTANCE GREEN FOR SUPPORT Blue – Demand Line Orange – Supply Line The Responsible Trader Lessons
- 5. The Responsible Trader Lessons The Responsible Trader Lessons Quick Review: When Bears Attack what are the probable Bulls Defenses?
- 6. The Responsible Trader Lessons Support against the downtrend NEUTRAL Just maintain a certain price level The Responsible Trader Lessons Bears Attack and Bulls Defenses ACTIVE PASSIVE Keeping with the downtrend
- 7. The Responsible Trader Lessons Let us now go to Module 5 – Volume and Open Interest Open Interest applies to Futures and Options only. I will limit our discussion to Volume so as not to complicate matters. Technical Analysis is based on two factors. These are Price and Volume. Our discussions so far have been about price movements, although we have acknowledged the importance of volume in confirming or denying what prices seem to be telling us. Price is certainly the most important. Volume is used primarily to confirm what the price is indicating. Of all the data in Technical Analysis, Volume is most often overlooked and taken for granted. The Responsible Trader Lessons
- 8. The Responsible Trader Lessons Volume is simply the number of shares traded over a given period of time. On some charting softwares, Volume is already integrated on the chart. On some trading platforms, it could be presented separately. Chart with Volume Integrated Chart with Volume Presented Separately The Responsible Trader Lessons Charts courtesy of Amibroker Charting Software C
- 9. The Responsible Trader Lessons Use of Volume in Determining Trend and Role of Volume during Formation of Patterns. Volume when properly understood and applied is one of the best ways of determining direction of the trend. Usually, volume increases in the direction of the trend. Volume also plays an important role in the formation and resolution of price patterns. Each of the price patterns discussed previously has its own volume pattern. As a rule, volume tends to diminish as price patterns form. The subsequent breakout that resolves the pattern takes on added significance if the price break-out is accompanied by heavier volume. Heavier volume accompanying the breaking of trendlines and support or resistance levels lends greater weight to price activity. The Responsible Trader Lessons
- 10. The Responsible Trader Lessons Volume increases in the direction of the trend. It is the best way of determining whether a resistance break is a Real Break out or just a Fake out. This is often overlooked by new traders. Real Breakout - accompanied with High Volume Fake-out – accompanied with Low Volume The Responsible Trader Lessons Charts courtesy of Amibroker Charting Software C
- 11. The Responsible Trader Lessons Volume also plays an important role in the formation and resolution of price patterns. Each of the price patterns discussed previously has its own volume pattern. As a rule, volume tends to diminish as price patterns form. The subsequent breakout that resolves the pattern takes on added significance if the price break-out is accompanied by heavier volume. Heavier volume accompanying the breaking of trendlines and support or resistance levels lends greater weight to price activity. The Responsible Trader Lessons Chart courtesy of Amibroker Charting Software
- 12. The Responsible Trader Lessons The first indicator used to measure Volume is On Balance Volume or OBV. Because of limitations of the OBV, another indicator, Chaikin, is used. The Responsible Trader Lessons Chart courtesy of Amibroker Charting Software
- 13. The Responsible Trader Lessons A Gap is break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between. Gaps can be created by factors such as regular buying or selling pressure, earnings announcements, a change in an analyst's outlook or any other type of news release. There are 3 types: Breakaway, Runaway and Exhaustion. The Responsible Trader Lessons Chart courtesy of Amibroker Charting Software
- 14. The Responsible Trader Lessons Reversal Days also called blowoffs and selling climaxes are dramatic market actions. The two terms are opposites. Blowoffs happen at market tops, and selling climaxes occur at bottoms. The Responsible Trader Lessons Chart courtesy of Amibroker Charting Software
- 15. The Responsible Trader Lessons 1. Volume is an extremely useful tool and, as we have seen, there are many ways to use it. 2. There are basic guidelines that can be used to assess market strength or weakness, as well as to check if volume is confirming a price move or signaling a reversal. Indicators can be used to help in the decision process. In short, volume is a not a precise entry and exit tool, however, with the help of indicators, entry and exit signals can be created by looking at price action, volume and a volume indicator. 3. Volume should increase in the direction of the current trend, for it to be sustained. 4. Volume often precedes price, so a reducing volume in an uptrend may precede a reversal. 5. Divergences between volume indicators and the price chart suggest trouble. The Responsible Trader Lessons SUMMARY
- 16. The Responsible Trader Lessons The Responsible Trader Lessons Do you want to know more about my Advocacy, Responsible Trading? Please visit, like and share: My Blog:http://www.theresponsibletrader.com– where I write and share lessons on trading and my thoughts about trading in particular and life in general My Facebook Page: https://www.facebook.com/theresponsibletrader – where I share what’s on my mind and make posts to groups where I am a member of My YouTube Channel: https://www.youtube.com/theresponsibletrader – where you can view and download my TRT-POV (The Responsible Trader’s Point of View) and other videos I intend to make My Slideshare: http://www.slideshare.net/TheResponsibleTrader – where you can view and download copy of the Powerpoint Presentation of my TRT-POV (The Responsible Trader’s Point of View) and other presentations I intend to make