I received some emails asking about "volume." It's time to clear things up. Well, here it is. "Volume" – the second most important button on your remote control. The first, of course, is "channel selection" and the third is "channel recall."  At the CPTI (Couch Potato Trading Institute), never let it be said that we don't go devote valuable space to going over basics. It looks like I'm going to have to publish a CPTI Trading Manual – with the important stuff.  By the way, "volume" has a secondary meaning. It can be an indicator when evaluating trading strategies – especially when trying to guess a direction. Why do people send ME questions about technical analysis? I'm pretty good on support and resistance levels. I can even draw a trend line now and then and identify a moving average here and there. Anything more than that is like getting too many toppings on a pizza. Any more than a few toppings, and you won't be able to taste any of them – and all you've done is spoil a perfectly good pizza.

Dear Mike,

I know that volume is one of the many indicators for past, current and or future performance. However, I'm often confused. I understand a price increase should be supported by an increase in volume, and a decrease in price should be reflected by lighter volume (if I'm looking at a stock with upside potential. I am long the stock and I want it to go higher). However, do I compare the volume against the previous day's volume, average volume for the stock (3 mo., 6 mo., etc), or do I look at the overall trend of the volume? -- Rick

Answer: Hello, Rick, my directional friend. Usually, when you see a stock moving higher, you want volume to increase over what you saw the previous day. You want to compare individual volumes to the 50-day volume average. For a breakout, a general rule is for volume to be 1.5 times the average daily volume on the move. This is not a 100% rule. For instance, let's say the stock has been consolidating for a week and showing solid volume all week in anticipation of a breakout. Then, the breakout can occur on solid, but not blowout volume. 

Sometimes a breakout move will not be on the increased targeted volume, but stock may still hit your buy point. Look for the volume to be moving steadily higher as the stock moves higher. If the market is in an uptrend, we are a little more flexible because the rising tide helps all stocks. But, if the market isn't moving up, you need to be sure there is a volume surge. Why? Because we need to see those big institutional buyers enthusiastically moving into the stock. 

Checking out the stock's chart can be useful. While a stock is consolidating, especially inside a base, look for overall volume to fall down to very low levels near the bottom of the base -- preferably below the average daily volume levels. This can last from a few weeks to a few months. When the stock begins to rise in the right side of the base, volume should start rising to above average levels on moves up, falling back on pullbacks, as it makes its way up. 

When we look at a stock's chart, we look at volume trends throughout the pattern, and even count the accumulation and distribution weeks to show if the stock is being bought or sold by institutions. Since it is institutions that move stocks, this is an important aspect of our analysis. We look at the larger picture, based on weekly totals, rather than daily totals.

A Great Seminar

Come join me January 29th & 30th for another fun and educational two-day option seminar. You've heard about people who have learned to trade options and were able to quit their jobs and work from home and make a fortune. Well, I guarantee that, after you attend my two-day seminar, you will have the tools to work with. What you decide to do with them is totally up to do. As is most any educational scenario, you get out of it as much as you put into it. Let me open your eyes to the possibilities and give you the tools necessary to turn possibilities into realities. Do you have what it takes to be a successful trader? Come and find out. 

In December, we had a terrific two-day advanced option seminar in Irvine. The students were particularly attentive, perceptive and receptive to learning the finer points of the option trading process. They were experienced option traders who had been following my writings for years. It was a great group of people who know how to make money. Now, they know how to make MORE money. They left, having learned some new strategies and trading techniques – ones they’ll be able to use for the rest of their lives to generate a healthy income. 

I invite you to come join me and other astute traders who want to learn new concepts, hone their trading skills, and to acquire knowledge that could conceivably change their financial lives. 

Many OTA students are taking advantage of the OTA policy of free retakes of my option seminar. A number of familiar faces show up on Sunday to go over my "special" strategy discussions one more time. 

Give the OTA gang a call at 1-888-841-8418 and ask get the details about our next Options seminar. I guarantee that it will open your eyes, open your mind -- and possibly fill your wallet.  

The Option Therapist

Mike Parnos, the "Options Therapist," has been trading, consulting and teaching option strategies for over 10 years. He specializes in exploring conservative and non-directional strategies while providing therapeutic guidance to individuals, brokers and institutional traders. He welcomes new patients. Five couches, no waiting. Questions and/or comments are welcome and can be sent to OptionsTherapist@TradingAcademy.com.