Ask The ExpertHi Paul, Is there more to volume than just the amount of shares traded? I keep hearing "... the stock was up on heavy volume..." and I am not sure why that's important. D.T.S.
Chicago, IL
Tips of the Trade
Technical Analysis
While fundamental analysis helps you decide what companies you may want to invest in - based on the company's management, products and services, financial records and other information - it won't help you figure out when to buy, sell or hold. There will be times when the stock of a solid company falters and times when a riskier company performs well. As a result, although fundamental analysis is important, it's not always sufficient to make investment decisions. Technical analysis - the study of price movements and trends - can help you figure out when to enter and exit the market.
Technical analysis, which gained momentum in the late 1900s as Dow Theory, is one of the oldest techniques used to make market decisions. Based on the ideas of Charles Dow, technical analysts use a variety of technical indicators - or series of data points plotted on a price chart - that have been formed using price or price and volume statistics for a particular security over a particular time period. Their goal is to spot market trends and predict price movements.
While some indicators use complex formulas and others are simpler, all of them seek to establish visual patterns that make sometimes confusing price data easier to understand and interpret. Indicators can be applied to stock, indexes, futures contracts and any other tradable instruments whose prices move in response to supply and demand.
While each indicator depicts patterns made by the price movements of securities, studying just one may not give you a complete picture of the direction the price is likely to head.
For example, an indicator may make false signals, called whipsaws, where prices move in one direction and quickly revert to an original trajectory. So, examining more than one makes it easier to spot true signals.
Furthermore, different indicators measure different variables. For example, the Moving Average Convergence/Divergence is used to show changes in price, while Williams %R helps predict trend reversals. Studying a combination of indicators can help you gain a balanced and inclusive perspective on a security's current and potential price movements.
However, regardless of the indicators you use and how closely you monitor the underlying investment, keep in mind that it's possible prices may not move the way you expected since investing is inherently unpredictable.
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