One of the the things I read regularly as I am studying stock trading is the “volume leads price”.
As Alexander Elder put it in Trading for a Living, “true breakouts are confirmed by heavy volume and when technical indicators reach new extreme highs and lows.”
The thinking goes that it’s worth watching the big financial players, the ones who truly have the funds to make a stock price move. When they invest, they try not to make their play too obvious, as this would only serve to push up the price of the company they are looking to buy. But, simply because they are large traders in and of themselves, they need to buy in large lots, often with a specific time period.
The leave a trail with increasing volume.
In an article that I found on Zacks, entitled Increasing Volume to Uncover Institutional Buying, Kevin Matras suggests that “because their purchases are often so large, it typically takes weeks, if not months, for an institutional investor to build a position. Given this commitment, considering it will also take several weeks or months to get out, you can be sure that these institutional investors have done plenty of homework to feel good about the fundamental prospects of the company.”
He also suggests, “What we’re looking for are noticeable increases, like 10%, 20% or 50% increases, etc. But nothing outrageous, like a 10 fold increase. Remember, the last thing an institutional investor wants to do is call too much attention while he or she is in the midst of building a position.”
So, today I have been trying to determine the best way to track volume movements of stocks.
Kevin Matras talks about a Zacks screen that uses the following parameters:
- Current Price greater than Price from 1 Week Ago
- Price from 1 Week Ago greater than Price from 2 Weeks Ago
- Price from 2 Week Ago greater than Price from 3 Weeks Ago
- Weekly Volume greater than Weekly Volume from 1 Week Ago
- Weekly Volume from 1 Week Ago greater than Weekly Volume from 2 Weeks Ago
- Weekly Volume from 2 Week Ago greater than Weekly Volume from 3 Weeks Ago
- Zacks Rank less than or equal to 3
- Price greater than or equal to $5
- Average 20-day Volume greater than or equal to 100,000 shares
However, Zacks is a paid service and, at this stage, I am not a member.
There are a number of free pre-defined screens available, like the Unusual Volume for NASDAQ Stocks and Stockchart’s Predefined Scans – Strong Volume Gainers (US, Canada), but none of the tools I have available (free or otherwise) allow me to screen for increasing volume.
However, one indicator that a lot of traders believe helps determine whether institutional investors are active buying is On Balance Volume.
And, On Balance Volume is an indicator found on a number of chart packages including my own brokering account.
So, while it would be nice to find a screener like the one Kevin Matras discusses, for now I will look to adding OBV to my charts as I analyse prospective trades.