V.14:3 (103-105): A Price- and Volume-Based System by Alex Saitta

V.14:3 (103-105): A Price- and Volume-Based System by Alex Saitta
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A Price- And Volume-Based System

Traders often use moving averages of just price to signal trends. Here's a moving average system that uses price and volume for trading signals. by Alex Saitta

N ot a month goes by that a trading magazine or technical analysis journal doesn't publish an article introducing a new and more sophisticated technical idea or tool. As a result, there's a widespread assumption that old ideas and simple tools are no longer applicable to today's markets - an erroneous assumption. The drive for ever-more sophisticated concepts and indicators notwithstanding, a trading strategy based on old ideas and simple technical tools can be profitable in today's markets.

The fundamental forces underlying financial securities tend to trend primarily due to the business cycle. As a result, security markets tend to trend† as well. Economic activity and bond prices are tied together, with the connection between them being demand and supply for credit. For instance, when the economy moves out of the recession phase of the business cycle and enters the recovery phase, the private sector's demand for credit increases. This causes long-term interest rates to rise and a downward price trend to develop in the bond market. Then, as the recovery strengthens and the economy cycles into the expansion phase, demand for credit grows, rates rise further and the downtrend continues.

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