Page 58 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

movement noted as the swing or local low. The bear rally or retracement up is the
countertrend in this case.

Volume
With price as the primary piece of information studied by technical analysts, volume is
number two on the list. Volume is the number of shares or contracts traded over a
specific duration of time. This window is usually one day, but can be as brief as minutes
or hours. Volume is important because it is expected to confirm or deny any trends
observed in price action. A comparison of current volume is usually made against
average daily volume. If current volume is less than average, the implication is the
existing price trend may be short-lived. If current volume is average or higher, it’s
estimated the price trend may be sustainable or may increase in momentum.

You could say volume is an indication of how widespread current opinion is among the
traders active in a certain stock. Price trends that appear to be backed by high volume
may indicate the current consensus opinion, not just a few contrarians.

Trends can also be observed with volume. When looking for confirmation of a price
trend, the volume trend should be increasing or about even with the average daily
volume over the same time period. When looking for evidence of a trend losing steam,
analysts want to see a trend in decreasing volume.

Price charts
Price charts, or simply charts, are a graphical means to display numerical data. As they
say, a picture is worth more than a thousand words, or in this case, data points.
Technicians use many ways to display price data, ranging from basic to advanced
styles. The basic components of a price chart are the time frame (which typically runs
along the x-axis) and the price range (which runs along the y-axis). Depending on how
the data are displayed, it is these axes which can have a profound effect on the
appearance of the trend — making it appear significantly more or less dramatic by
changing the axes’ scale. In evaluating a potential trend, make sure you understand
how it’s being visualized on your chart.

Most charts default to a daily time frame setting, but in practice this setting can be quite
short or very long. A tick is the smallest increment by which a security can change in
price. For most stocks, a tick is one penny. Although uncommon, a tick is also the
smallest increment available as the x-axis of a price chart. Other durations include
minutes, hours, weeks, months or years. If there is only one data point shown for the
selected time frame, it is usually the closing price.

Oftentimes, there are four data points per time frame — the open, close, high and low.
The price scale runs along the y-axis, usually on the right side of the chart. How wide or
narrow the increments between the prices are in the vertical axis has a significant
impact on the appearance of the data. If the spacing is wide, the strength of the trend
can seem stronger than it may be. If the distance is narrow, a strong trend may be

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