What makes a stock price rise and fall? The quick answer to that question is Buying and Selling Volume. Volume in the context of trading refers to the number of shares exchanged between buyers and sellers participating in the stock market.
Simply put, stock prices rise if there are more buyers than sellers and they fall when there are more sellers than buyers. A best practice approach is to be able to determine when the buying and selling is greater so that you can determine the proper time to enter and exit your stock positions. Here are some tips on how you can interpret volume to better improve your market analysis.
Riding the Wave of Institutional Buying
Think of your trading activity in the context of sailing in the high seas. Visualize the sea current as the buying and selling activity of big financial institutions. If you are going against the current, it will be extremely difficult for you to get anywhere. But if you sail alongside the current, you'll move effortlessly. The same concept applies to stock trading. You buy when the big institutions are buying and sell when they start unloading their positions.
Getting to Know The Market Movers
In the stock market ecosystem, the top of the food chain belongs to the Big Foreign Institutions. The billions of capital at their disposal allows them to break support and resistances at will. They can send low capitalization stocks to new highs and they can sink them to record lows. However, being the big fish of the market has some major disadvantages. A major con of moving huge amount of money is its slowness. It takes these big institutions days to weeks to fill up their orders or to dispose their positions. This allows small retailers like us to re-calibrate and align our trading activity in response to the stance of these big institutions.
In the PSEI, the main market movers are foreign buying and selling. As such, it is important to familiarize yourself with the notable foreign institutions to check if they are at the buying or selling side.
Here is a list of the notable Foreign Institutions in the Philippines Stock Exchange:
1. Macquarie Capital Securities,Inc. 2. J.P Morgan Securities Philippines, Inc. 3. CLSA Philippines, Inc. 4. Credit Suisse Securities, Inc. 5. Maybank ATR Kim Eng Securities, Inc. 6. UBS Securities Philippines, Inc. 7. HDI Securities, Inc. 8. DBP-Daiwa Capital Markets Philippines, Inc. 9. UOB-KAY Hian Securities Philippines
Tracking the Big Fish
Part of analyzing volume is the tracking of institutional trade activity. You need to determine who the buyers and sellers are. This way, you can check ongoing stock accumulation and get a lead on a potential play.
During major market uptrends, you will notice that there are significantly more shares being bought than sold. As such, traders are forced to buy at higher prices thereby moving the stock prices higher each day. For market downtrends, the disposition of shares by major institutions are very apparent. This will occasionally trigger panic selling scenarios causing prices to gap down and significantly sink.
1. Looking at Historical Broker Transactions
Depending on your trade platform, you will be able to see the trade activity of stocks for a certain timeframe. This allows you to track the major institutions that are potentially accumulating a specific stock. This strategy enables you to determine potential plays that may unfold as major institutions start hoarding shares of specific stocks that could result to a sizable rally.
2. Looking at Daily Trade Activity
You can also track the daily exchanges of shares for a specific stock through the bid/ask counter in your trade platform. This allows you to get a feel of the market sentiment for the day. Good demand for the stock is translated as high bid orders in the counter. If the ask volume is higher than the bids, then this can point to a bearish sentiment for the day.
Interpreting Volume in the Charts
Volume validates price action. When analyzing a price chart, the volume determines the validity of a particular move. This is particularly useful to assess the strength of a breakout and breakdown pattern.
Price breakouts that are accompanied by a surge of buying volume will likely be followed by a sustainable rally. Without the high volume in demand, stock breakout attempts will result to a profit taking scenario and the price will retrace back to its previous support.
Volume also validates bearish pattern formations. In the chart above, you will notice a breakdown of the 6.00 support which is accompanied by a surge in selling volume. This gives weight to the breakdown and will likely result to a downtrend shift in the price. Breakdowns like this one should trigger the cutloss levels of your trade strategy to allow you to safely get out of the position.
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