So let’s assume you’ve been following a stock and you feel good that all the signals you depend on to identify a potential buy are in place but you still would like a bit more confirmation before pulling the trigger. You need to know that this stock is primed and ready to go. It’s a hard decision to make, wait too long and you risk missing the move, jump in too quick and you may end up scrambling to get out. Most traders easily notice price break outs but savvy traders may pick up on a spike in volume in advance of the stock price beginning to run significantly. A high volume break out can be indicative of smart money trying to quietly acquire significant amounts of stock. Although this may cause some movement in price, when done correctly in can go unnoticed by many novice traders. A volume break out is usually demonstrated by a 30 to 40%, of better rise in a stocks daily average volume. This volume spike may occur with relatively no noteworthy news on the stock or its sector.
An essential factor in using volume to indicate a potential price surge is watching the stock price in relation to the volume. Stock moving up after forming a solid base of increasing volume and price is a sign investors and traders are jumping in to the game, while price gains in relatively weak volume may indicate that the big boys are playing and price gains may be short lived.
Keeping an eye on the relative strength of the stock compared to market average is also necessary in confirmation of a volume break out. The stock should be approaching new highs and outperforming the proper index. Determine if the stock is leading the way of lagging behind the broader market and be prepared to run like hell if it has weak volume when everything else in its sector is gaining significantly.
Increased volume is a good indicator of whether a stock is gaining steam and poised to break out to new highs, your ability to read the signals in a timely fashion is a key component to your survival as a trader.