V. 22:6 (18-22): Does Volume Matter? by Thomas N. Bulkowski

V. 22:6 (18-22): Does Volume Matter? by Thomas N. Bulkowski
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V. 22:6 (18-22): Does Volume Matter? by Thomas N. Bulkowski

If a chart pattern breaks out on high volume, is it a blessing or a curse?

Recently, I was reading some reviews on Amazon.com for a book on technical analysis, and one reader comment that stuck in my mind was that the author didnít discuss volume. Maybe itís because volume isnít important, I thought. In my daily routine, I rarely look at volume unless Iím considering a trade. Otherwise, it doesnít even appear on my screen. But how important is volume? Does a high-volume breakout really suggest a better-performing pattern? Does a receding volume trend over the lifetime of the pattern suggest better post-breakout performance? I decided to find answers to these questions.

MEASURING BREAKOUT VOLUME

How do you measure volume? An exceptionally high daily volume in a sparsely traded stock might be less than an hourís worth in an actively traded stock. So stock-to-stock comparisons would be worthless. To measure volume, I chose the volume average for each stock.

I computed the average volume for the three months before the breakout and assigned two categories to the breakout volume: above-average volume (more than twice the average) or low volume (average or below average). Then I looked at chart patterns and mapped the volume with performance.




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