V.11:5 (215-219): Volume Variations by Barbara Star, Ph.D.

V.11:5 (215-219): Volume Variations by Barbara Star, Ph.D.
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Volume Variations by Barbara Star, Ph.D.

This month, Barbara Star uses a 1986 STOCKS & COMMODITIES article by Howard Waxenberg titled "Technical analysis of volume" as a basis for a tutorial on volume-based indicators.

volume offers a view of the internal structure of the market that might otherwise be hidden. Volume is the total number of shares traded on a stock or stock index on any given day. The daily volume number includes both the number of shares bought and the number of shares sold on that day. In his article "Technical analysis of volume," Howard Waxenberg found that keeping a running average of the total daily volume provided a good indication of what he considered "normal" volume. Think of normal volume as a baseline measure from which to judge whether prices are moving with a trend (volume should increase as prices move in the direction of the trend and decrease during countertrend price corrections) or when price breaks out of a congestion phase (volume should expand during price breakouts) .


The indicator that Waxenberg presented determines the normal volume figure by computing a 10-day moving average of daily volume. The indicator can be used with any stock, commodity or index price data for which there are daily volume figures. As Figure 1 illustrates, the normal volume indicator provides an easy-to-use confirmation/nonconfirmation tool. Often, divergences between the indicator and price movement occur many days in advance of an actual price top or bottom; so, it is possible to tell when a market is running out of steam. In addition, when price either tops or bottoms and the volume moving average indicator is near the bottom of its scale, it means that buying or selling pressure has dried up and a change in trend is at hand. Because the indicator rises as volume increases, it will move in the opposite direction from price action when prices begin a steep decline. On occasion, that makes it difficult to determine in which direction the trend will change. I have found that using a five-period simple moving average of closing price provides a good clue to price direction.

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