In the world of technical analysis, the best trading indicators are always price and volume.
Yes, you can choose from hundreds of indicators to evaluate chart action. Momentum indicators, stochastics, oscillators, price bands, moving averages and specialized combinations provide valuable information about current and past price moves. In addition, on balance volume and volume oscillators give us deeper volume analysis.
Why price and volume are the best trading indicators
Price is king, and volume is right behind it.
I always look for patterns within the price chart, as they tell me if more buyers are coming in (usually at a higher price) or more sellers are shedding the stock (usually at a lower price).
The stock market acts like an auction and is guided by the law of supply and demand.
- When stocks are in demand and there is less supply, prices have no choice but to rise (in a free market).
- When there is no interest in a stock at a certain price, the price will fall until it hits a price level that attracts buyers.
Of course, stock prices move around all day long and seek a balanced level where buyers and sellers agree on price.
How volume supports price
Volume trends tell us whether or not a stock price has support. Volume is like a polygraph test, there is no lying. When we see a stock rising up sharply on strong volume it tells us all we need to know: big buyers are coming in and accumulating the stock.
Big institutional players, who we like to follow in and out of stocks, are very patient buyers. They will wait for the right time to add more shares. You can discern a bullish or bearish view by evaluating the conviction of the buyer, which shows up in the volume prints.
I find price and volume charts to be the best trading indicators because they tell you everything you need to know about stock moves. They present you with factual data about what’s happening now but also provide clues about where a stock may be headed in the future.
Need to learn more about how to read chart patterns? Read this free chapter from my book, Know Your Options.
