Do you check the volume of a stock before you pull the trigger? If the answer is no, then you should. Volume can show the direction of a trend in the same manner as price action (the day-to-day price changes of a security). As you probably know already, volume can be found at the bottom of a stock's chart. With that said, just because it is located at the bottom doesn't mean you shouldn't pay attention to it. Volume Is Like Gas Volume can tell a lot about the future momentum of a stock. Think of it like gas. In order for a car to drive a long distance, it needs a full tank. In terms of the stock market, this means that in order for an upward or downward trend to continue, the volume must be present. Without gas, or volume, neither the car nor the stock will go anywhere. While it's true that a stock can trade up or down without heavy volume, trends are confirmed or denied based on the action of the volume. Let's compare two stocks, ABC and XYZ. Stock ABC has gained 5% in three sessions, but traded half as many shares as normal each day. On the other hand, stock XYZ gained 3% over the same three sessions, but each day traded three times its average volume. Which will most likely be higher a week from now, all else being equal? Most likely stock XYZ. This is because there is a negative divergence -- a contradiction between two indicators -- between stock ABC's price movement and volume. To confirm or deny a trend, you want a stock's price movement and volume to move in tandem.
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In tough times like these, traders often feel as though things can never go their way. This feeling typifies how stock trading can be incredibly emotional. We all want to make money, and that can mean chasing a stock on its way up or calling a bottom on its way down. Everyone has bought a stock at one point or another because they felt like it "just can't go any lower" or "this rally is just getting started." But the traders who consistently beat the market are those who realize that emotion has nothing to do with the performance of a stock. These successful traders also obtain many other qualities; today's article highlights 10 of their most lucrative traits and their implications on your portfolio.
1. Remove Emotion From The Equation
As I mentioned above, successful traders are those who have removed emotion from the equation. (It is worth noting, though, that I am not talking about investor sentiment, a topic that I extensively covered in a previous article). A stock does not increase in value because people think it will go higher; rather, it does so because traders and investors have made the conscious decision to allocate capital toward it. We all know this, but often forget it in the heat of the moment. Before you submit your order, reflect on why you've decided to enter the trade. Is it because you "just have a feeling that it will go higher" or that you conducted thorough technical or fundamental analysis?
2. Don't Chase Anything, Ever
Seems simple, right? Buy low and sell high, they say. But this is much easier said than done due to the interference of emotions. Everyone wants to make money, but more experienced traders know that more often than not, chasing a stock will result in losses. In theory, this makes sense. Take the scenario of people sitting at their monitors, just like you, and watching the same stock spike right before their eyes. Before they can even enter the trade, thousands of share have traded hands and the stock spikes even more. By the time your trade goes through, it is likely that much of the air has deflated and the stock begins to rapidly descend from its high, as money managers are ripping the carpet out from under you before you can even realize it. Learning not to chase a stock higher (or lower, if you're on the other side of the trade) comes with experience. If you've fallen victim to the scenario I just played out, use it as a learning experience.
3. Be Patient, Young Grasshopper
The previous two points go hand-in-hand with patience. It is advantageous to wait for a stock to show signs of a bottom before attempting to catch a falling knife. Likewise, it is smart to deal with the short-lived pain of seeing a stock spike before your eyes for the rewarding feeling of purchasing shares after its descent. Moreover, make sure you wait until your prospective trade has fully setup to your specifications, and don't assume that any indicator will produce a buy/sell signal. Always confirm before you earn.
4. Bulls Make Money, Bears Make Money, And Pigs Get Slaughtered
So don't get greedy. If you've used technical analysis to project a price target and the stock is currently trading at that level, place the sell order and do not change it. This applies to both long and short positions. He who believes that they can squeeze more return out of their trade -- the inexperienced trader -- is often compelled to sell at a smaller gain. Remember that any profit is a good profit. |