Stock charts also provide insight into the ongoing behavior of traders and investors that's just not available anywhere else. If a potential investor can discover the motivation behind that decision making process and act upon that knowledge in a timely fashion, the American Dream is his for the taking!
Bid and Asking Prices
Every quoted stock price has both a bid and asking price, not just a single price. There's someone who is actually bidding the bid price and someone else who is actually asking the asking price. That's a fact that many new traders always seem to forget.
The price you see quoted when you look up the price of a stock on the internet is really the price that was transacted on the last trade. It's not the current bid and ask price. In order for that last trade to have occurred, there had to have been an agreement on price between a buyer and a seller. If buyers have locked their bid at the quoted bid price and sellers have locked their selling price at the asking price, then trades would never occur. Someone has to breach the gap between the bid and ask price in order for a transaction to occur. And if no trade ever occurred, there wouldn't be any volume in that stock that day. This simple act of selling at the bid or buying at the ask is what creates volume.
Volume is Critical to Understanding Price Movement
If volume starts to increase and the price starts to rise, I’m seeing buyers cross the spread and bid the stock higher. If volume starts to increase and the price starts to fall, I’m seeing sellers cross the spread and push the stock lower. Regardless of why these traders are creating volume and pushing the price higher or lower is something I may never know but I can visibly see what they are doing right there in the chart. I can see people act upon decisions they have made right there on the chart in real time. And the more volume I see tells me that an increasing number of traders are coming to the same decision and acting on that decision by trading the stock. Charts are a fascinating view on the decisions and behavioral patterns of stock traders.
Let the Trend Get Established Before You Commit
A trend following investor simply determines which way the price and volume are moving and then trades in that direction. If traders start pushing a stock higher, I want to be long that stock. If traders start pushing a stock lower, I want to be short that stock. I want to trade or invest with the crowd and with the trend. I really don’t want to be on the wrong side of a trend. That’s just too detrimental to my financial health.
I can and have traded successfully throughout my career using only price and volume as indicators of the trend. But I did this many years ago when very few other indicators were available and most of them were unreliable. Today there are so many additional indicators that I can use to confirm my trading decisions that I rarely trade using only these two things - price and volume. Today I use momentum indicators and oscillators to confirm my trading decisions. I have my favorites and reader's of these articles will realize they're the MACD, the RSI, and the ADX. They’re wonderful tools for both beginner and experienced investors because they will increase any investor's probability of success.
Good Luck and Good Trading