- Technical analysis involves detecting and analyzing patterns of volume as well as price.chart background image by Stasys Eidiejus from Fotolia.com
Technical analysis is the examination of past stock market data to forecast future movements in the market or in individual securities. Because this data is usually displayed in the form of charts, practitioners of technical analysis are sometimes called chartists. While historical stock price and prediction of future price get the most attention, the volume of trading on securities can also yield useful information. Technicians have developed various tools to assist them in analyzing the data contained in trading volume. - One of the simplest tools for analyzing volume is the Rate Of Change Volume oscillator. The ROCV graphically displays the change in trading volume over time. This chart is usually examined in conjunction with a price chart from the same period. Volume often spikes at key points in a security's price. The most significant of these is upon breaking out of a range. A technician recognizing this as it happens will be in a position to acquire the stock right before its increase in value.
- A somewhat more sophisticated tool is the Volume Oscillator. The VO uses a pair of moving averages, one faster than the other. The moving average can smooth the line plotted representing data that can change rapidly. This can mitigate the noise caused by plotting daily values to reveal a more general trend. The use of multiple moving averages works on the same principle. It can be very easy to see very high correlation between VO and price movements.
- On Balance Volume (OBV) is a tool created and popularized by investor and author Joseph Granville. It measures both positive and negative volume. That is, it quantifies whether money is flowing into or out of a particular security or contract. The theory of this tool is that price can be driven (at least partially) by volume. When trends in price and volume are consistent, the trend is more likely to continue. Where price information contradicts OBV, the trend is viewed as being more likely to reverse.
- The Ease Of Movement indicator, EOM, was devised by Richard Arms. This indicator measures the correlation between changes in volume and changes in price. Where price appears more sensitive to changes in volume, the indicator will have a higher value. When prices do not seem to respond to changes in volume, the plotted value will be lower. This makes the EOM one of the easier indicators to put into use. When the EOM plots higher, buy the security. When it is lower, sell or short the security. There are dozens of other tools used in technical analysis as well as investment philosophies to put them to use.
