Although the stock market has long-term trends, investors can also spot daily trends. Opportunities develop by the hour, and an astute investor who knows what to look for can take advantage of them. Some daily trends signal the beginning of longer-term moves in the market. Investors who find these can profit before everyone else figures out that a trend has begun.
When a stock rises on increased volume, that could signal the beginning of a trend. Stock charts show daily volume at the bottom of the chart. Volume appears as a bar graph. The higher the bar, the more trading volume in that stock. If a volume increase accompanies a downward move in a stock, a downtrend might be starting. High volume tells investors what the crowd is doing, and if the crowd buys or sells a stock, investors who trade trends might join the crowd.
When a stock makes a move on lower than average volume, the new move might not be sustainable. For example, when a stock drops in price but trading volume is low, sellers are not pouring in. In fact, the low volume suggests that only a few stockholders are selling. If a stock moves up on low volume, buyers are not showing much conviction. Low-volume moves in either direction do not indicate the beginning of a trend.
If a stock keeps retreating throughout the day, it will show lower highs each time it tries to recover. The pattern will look like stairs going down. Buyers keep coming back to drive the stock back up, but sellers take over each time and push the stock down even further. A series of lower lows can signal a trend. The downward move might continue until all of the people wanting to sell that day have pulled out of the stock.
A stock that is trending upward tends to show higher highs. Each time it reaches a new peak, sellers might step in to force it back down, but it keeps rebounding to go even higher the next time. Investors who trade trends watch series of higher highs in a stock as a signal of a possible uptrend.
In trends, volume works together with price action. A series of higher highs on increased volume offers signals that the stock will keep going up. Higher volume confirms the higher highs. Similarly, increased volume in a series of lower lows can may confirm a downward trend. The increased volume indicates that more and more people are getting out of the stock.
Video of the Day
- Jupiterimages/Goodshoot/Getty Images