Data analysis, candlestick patterns, chart patterns & indicators are the basic ingredients in technical analysis which are have to be followed up before determining your own set of
share investment . Volumes are another key ingredient which can falsify your predictions with regard to a particular stock.
Volumes are nothing but it is the number of contracts or shares traded over a period of time. Volumes determine the activity of the securities. The higher the volumes, higher are the activity in the security and greater is the momentum in it. Volumes play a major role in determining the formation of the patterns and confirming their breakout. Suppose if a Head and Shoulders Pattern formation has taken place and an upside breakout is coupled with heavy volumes, then that breakout shall be regarded as the true & genuine one, otherwise, the breakout is false. The next trading session shall witness the resumption of the original range below the neckline. Hence, if the volume is weak, then even the best of chart patterns, indicators and moving averages can give you the fake signals.
Weak volumes mean weak participation by the traders. If the stock has been in an uptrend with subsequent rise in the volumes, but after some trading sessions, the volumes starts diminishing but the prices are still high, it means that traders are wary of the stock and the trend reversal is going to take place. Here, the
share investment (in this particular security) is not feasible in the short run. Money Flow index will show you the clear picture of it because after a consequent rise it may either start running flat. Money Flow index indicator takes both price and volumes into account and hence is regarded as an appropriate indicator in order to determine the relativity of prices with respect to their volumes.
I used to get left out in granting due justice to my analysis because of my ignorance towards the importance of volumes. There used to be the stocks which had shown the clear downside breakout from its 20 DMA. There should have been further short positions, but the next trading session witnessed the stock regaining its support with 20 DMA again. This was because the volumes on the downside breakout were very less; meaning the extent of the sellers participation was waning and shall not be able to hold prices much lower. So the next session witnessing the stock to resume its support with 20 DMA was not unexpected.
