Volume is a count of trades in a security or market, or their derivative instruments and can be indicative of trends and sentiment. Volume is the number of trades in a security or market in a given time. Trade volume is important because it helps analysts pick apart the factors driving a trend or get an idea of the strength of a trend. Potential buyers and sellers can push the Bid and Ask prices around at will, hypothetically, but a trade only occurs when the buyer and seller transact business; also, even only a minimal number of trades can move prices around, but this is not indicative of a strong trend — a few trades more and the price is where it was before. Continue reading...
The Accumulation/Distribution Indicator (originally called the Cumulative Money Flow Line) tracks cash flow into or out of a security and correlates the cash flow changes to changes in the security price. By following the trading volume into or out of a security, it establishes the degree of correlation between this trading volume and the price of the security. Accumulation/distribution is designed to reveal divergences in price trends (specifically between stock price and trading volume). These divergences indicate the degree to which a security may be overbought or oversold at a given time. Continue reading...
Open interest is a measurement of the outstanding open positions in a derivative security. Strong open interest means the derivative will have high liquidity. Open Interest is not the same thing as Trading Volume, but it does give an indication of liquidity and activity in a derivative. Open Interest is the number of open positions for a derivative, like an option. The Options Clearing Corporation tallies up the ‘open interest’ numbers, but they are not posted until the morning following the count. Open Interest isn't necessarily indicative of a bullish or bearish forecast for the underlying security, but it does generally mean that the option will have high liquidity and that a seller will be able to find a buyer. Continue reading...
Chart patterns are shapes that sometimes appear in the charts of securities prices. Some of them may prove useful to you. Some frequently discussed chart patterns include Head and Shoulders, Double/Triple Bottom/Top, Cups and Saucers, Flags and Pennants, and others. Generally, it can be useful to compare and connect the troughs to each other and the peaks to each other to see if there is a trend confirmation if the breadth is narrowing, or if a reversal might be imminent. Continue reading...
The Volume Weighted Average Price (VWAP) helps traders consider the influence of volume on prices. VWAP is calculated by taking the average of prices from a time period and dividing it by the trading volume for the current day. Traders use VWAP to confirm trends and decide whether to take long or short positions, while large institutions are likely to use VWAP to avoid disrupting market prices, finding the liquid and illiquid price points and trading so as not to move prices away from the averages. Continue reading...
On-Balance Volume (OBV) is a popular leading indicator introduced in the 1960s by Joe Granville. OBV is a line built using differences between daily trading volume – in Granville’s estimation, the major driver of market behavior – adding the difference on days that the market or stock moves up and subtracting the difference on days when the market or stock moves down. It looks for instances of rising volume that should correlate with price movement, but price movement has not occurred; additionally, OBV can be used to confirm lag. Continue reading...
FOREX is an international market which allows participants to exchange various currencies at the current rates of exchange and in the future. Forex trading can be profitable but it can also be risky. The daily volume of FOREX is about 3 trillion dollars, which dwarfs equity trading internationally in terms of daily volume, being somewhere around $30 billion. With so much movement and liquidity, it can also dwarf equity markets in terms of volatility. This can present a large amount of risk if investors are not knowledgeable and prepared to hedge or exit their positions. Nothing should be invested In Forex positions that an investor cannot stand to lose. Continue reading...
The Positive Volume Index (PVI) is a technical indicator that tracks increases in trade volume for an index or security, as well as the changes in price on those days. Paul Dysart developed the original version of this indicator for market indexes using advance-decline numbers instead of prices. The Positive Volume Index was then redesigned by Norman Fosback for individual securities – the version commonly used today. Continue reading...
The Negative Volume Index (NVI) is a technical indicator that tracks decreases in trade volume for an index or security, as well as price changes on those days. Paul Dysart developed the original version of this indicator for market indexes, and it garnered renewed attention when it was reworked in the 1970s via Norman Fosback in his book Stock Market Logic. The price changes in a security or the percentage change in an index are only added to or subtracted from the Negative Volume Index on days when the trading volume is lower than the day before. By watching market movement on days with lower trading volume, investors can identify where institutions and fund managers are moving their money. If trading volume is down and the market continues to do well, it means that there is a strong bullish primary trend, and that trading volume is not artificially pushing prices around. Continue reading...
The Short Interest Ratio (SIR) measures investor sentiment for a given company and is calculated using the number of shares being shorted divided by the average daily trading volume of the stock. Also called the short ratio or float short, the SIR is a ratio of the number of shares being shorted divided by the average daily trading volume for the stock over the last 30 days. The ratio can be interpreted as the number of days it takes short sellers to repurchase borrowed shares, or an approximation for the number of shares that have been sold short and not yet covered as a percentage of all trading volume. Continue reading...
Overlays are technical supplements which help to interpret the data of a normal price chart. Often a chart program will allow the user to pick a few different overlays at a time, to help him or her get a better idea of what is going on with the price. Some common overlays include moving average lines, Bollinger Bands, Ichimoku clouds, and channel lines. An overlay or series of overlays will appear as additional lines, shading, or other graphics on a price chart. An overlay helps a trader or analyst interpret the price data in the context of other data, by putting the other data right on top of it. Continue reading...
A market order is an order to execute a trade (buy or sell) immediately at whatever the current market price. If an investor places a market order after hours, for instance, the order will be filled at the market’s open wherever the price of the security is. Placing a market order, also known as an “unrestricted order,” means the person trading the security is more concerned with timely execution of the trade than they are the actual price. If a market order is placed for a security that has very high volumes and is a common stock, the market order is likely to be filled right away. Continue reading...
The Ease of Movement (EMV) indicator measures the degree to which prices can be moved by a lower volume of trading. It was developed by Richard Arms, inventor of the Arms Index, which also attempts to quantify the relationship between price movements and volume. High positive values indicate a present tendency for prices to increase on low volume, and larger negative values indicate that prices are slipping lower but with relatively low trade volume. Continue reading...
Market momentum is the tendency of a trend to continue in one direction or another. Various analysis methods and indicators seek to identify the strength of trends and to find points of possible reversals and retracements. A market has strong momentum when trading volume is up and confirms the direction of price movement in the market. Bullish or bearish market sentiment will influence the degree of momentum that is present. Continue reading...
Open interest, or OI, can be a very important number for futures, options, and other derivative markets, but it can also be important to traders in the traditional stock market. Open interest in derivatives of stocks indicates that there is a deep market for the stock itself, since many of the positions may eventually require the purchase of the stock. Increases and decreases in open interest may help a trader understand if there's significant action in a security's price movements, which can determine liquidity needs as well as whether the price movements are rooted in actual supply and demand characteristics. Continue reading...
Investment banking activity is different than traditional banking. Investment banks often serve as intermediaries that underwrite a new issue of stock and help to distribute it. They also trade in their own accounts, run hedge funds, and generally invest and speculate in ways that most institutions can’t. Investment banks can assist with new issues of stocks and bonds, purchasing large blocks of them to distribute at a premium. Continue reading...
Richard Arms invented the analysis tool that bears his name in 1967. The Arms Index, a technical analysis indicator, is also called the TRIN (short for “Trading Index”) because it seeks to indicate overbought or oversold conditions by serving as an index of trading activity relative to price. The Arms index is calculated using readily available data from major indexes such as the S&P 500 or NASDAQ. The ratio of the number of advancing stocks (stocks whose prices are increasing) to the number of declining stocks (stocks whose prices are decreasing) is computed to give us the A/D Ratio, a market breadth indicator that is one way of viewing the daily breadth of a security. The Advance/Decline Ratio uses the same numbers as the Advance/Decline Line but presents them as a ratio instead. The AD Ratio is sometimes more useful than an AD Line, including in instances where comparing AD for different indexes which have different metrics; the ratio is the standardization with which comparisons can be made. Continue reading...
Market Breadth is a descriptor that is used in several market indicators such as the daily breadth, the A/D Line, the McClellan Oscillator, and Arms Index. Breadth is the relative difference in the amount of advancing stocks and declining stocks. Daily breadth is simply computed by subtracting one from the other, or creating a ratio in which one is divided by the other. Daily breadth is closely related, even interchangeable, with the Advance/Decline ratio. It can also refer to the difference between New Highs and New Lows, or Net New Highs. Continue reading...
A Limit Order is a type of order to buy or sell a security, where the trader wants to set a specific price for the trade, or any price that’s better than the price set. From a buy and sell standpoint, a buy limit order would be designed to have the trade executed at the designated price, or any price lower than that. A sell order is just the opposite, where the trader hopes to execute the trade at a minimum set price. Limit orders typically have a period of time before they are canceled, if the designated price is not reached by a certain period. Continue reading...
In the financial markets, “Ask” is the price that a seller is willing to accept for a security. It is also known as the offer price. Given the market is constantly changing, Ask prices are rarely set in stone for long. What’s more, the Ask price on a security may not necessarily be the best going price available for it. It merely represents what that particular seller is willing to accept for it. What is a “Spread”? What is a Market-Maker Spread? Continue reading...