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Price and Volume Analysis - The Key to Making Big Money

April 23, 2012 | Comments: 0 | Views: 146

Charts are an essential tool for success in the marketplace

Making big money is the goal of every trader or investor. Price and volume analysis is the tool to help you achieve that goal. When you get right down to it, everything in life is based on probabilities or odds. It is no different in the stock market or any other trading venue.

If you want to be a successful trader or investor, you simply must put the odds in your favor when you trade. A great way of putting the odds in your favor is by properly analyzing charts. They offer a unique insight into the mind-set of the markets.

Since markets are controlled by humans, and human nature never changes, you will be at a great advantage by properly analyzing charts. Charts are a true record of human psychology. That's why you see recurring price patterns on the charts. Those patterns can be used to forecast the future movement of a stock, or the market in general. If you are successful, you will be making big money.

Supply and demand

Price and volume analysis on a chart will provide a record of supply and demand. This is a history of the trading action in a stock. When demand for a stock, known as orders to buy, is greater than supply, known as orders to sell, the price must go up. Obviously, if supply exceeds demand, the price must go down.

The purpose of analyzing a chart is to determine the strength of demand versus pressure of supply at various price levels. This will allow you to predict the probable direction a stock will move. The history of a stock's price movements, along with volume recorded on a chart, are major clues.

Let volume be your guide

Volume is a measure of the intensity of buying and selling pressure. Basically, it is the conviction behind a price movement. The greater the volume, the more important the price movement usually is. During a healthy up-trend, volume will increase as prices are rising. When prices pull back, volume tends to be lower than average. This is true for an individual stock, or the market as a whole. Price and volume analysis is a great tool for making big money in the stock market, or the futures market.

Watch for a price reversal

When you get changes in a volume pattern, it should be considered a red flag. Many times it is a warning of a trend reversal before it actually happens. You could be going along with higher volume on rallies, and lower volume on price reactions to the downside. Suddenly, volume becomes low on the rallies, and increases on the reactions. This is telling you something. There is a good chance of a pending price reversal.

Follow the big players

If making big money is your goal, you need to know if the big players are buying or selling. Price and volume analysis will tell you exactly what the big players such as mutual funds, hedge funds, and pension funds are doing. When a stock significantly goes up in price, and volume is much heavier than normal, that is your clue that big institutions are supporting the stock. These big institutions account for over 70% of all trading activity. Big demand means big price advancements.

Gary E Kerkow, founder of Tradingmarkets4u, is a stock and commodities market expert. He is a successful trader and instructor, with over 20 years experience.

Learn how to receive a free "Stock Of The Decade" special report.

For world-class trading information, go to http://www.tradingmarkets4u.com

Source: EzineArticles
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