Volume - Part 3

In part 1 we covered: What happens when we have lack of volume
In part 2 we covered: Why volume is necessary and how to use it
In part 3 we will cover when volume is not a necessary part of our investing.

We normally like to think that volume is the key to a successful trade, however there are actually times when you can completely bypass the volume.

When a stock is trending, volume is not the primary concern for most investors. It is generally considered important for a stock to have a volume spike or an increase of volume if we want the stock to break up through resistance or down through support as shown in part 2 of this series. But while the stock is trending no volume is necessary. Volume spikes are the catalyst to get a stock to change what it is doing. That little extra push to make the stock move outside if its current pattern.

If however, the current pattern is a trend up or down then the volume is not necessary. It is when you get the volume spike that you should then see the stock change its trend.

In the chart of GIS below, the stock was in an uptrend from February to October and the entire time the volume was fairly flat. It was not until a volume spike came in mid October that the stock changed its trend. Volume spikes are only considered a necessity of we want a stock to change its trend. Since the current trend was up, investors we fine with buying the stock even without increasing volume.


The second place where you can overlook volume, or even pull it from your charts is when you are looking at ETF's. Many investors don't realize that an ETF follows a group of stocks. When that group trades higher, the ETF moves higher. When that group trades lower, the ETF trades lower, regardless of whether or not anyone bought or sold the ETF.

Take the DIA. It is the tracking stock of the Dow 30 Industrials. When the Dow moves up the DIA moves up and when the Dow moves down the DIA moves down. If not one person purchased the DIA, it would still have to track the Dow 30 Industrials. If every single investor in the country bought the DIA, the DIA would still track the Dow 30 Industrials. Volume is a useless indicator when tracking the ETF's.

Cheers,
Mike

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