Episode #2 – Tutorial In Technical Analysis By Alan Hull

Alan Hull is a renowned technical analyst within the Australian Market. He has educated thousands of investors on how to apply technical analysis within their overall strategy. In this special series, Alan has agreed to share his Technical Analysis tutorials with Stockopedia members. To learn more about Alan you can read his profile here. Or visit his website alanhull.com.au

Trading Volume

Apart from price, there is another primary element that we can also include when analysing charts and that’s trading volume. Trading volume, as the name implies, is the number of shares traded during any given trading period…and not be confused with the value of shares traded. Volume is commonly displayed as a histogram (vertical bars) at the bottom of a price chart. So adding volume into our chart of BHP gives us the following picture which conveys 5 discrete bits of information for each trading period. Opening price, the high, the low ,the closing price and the trading volume…

Candlestick chart of BHP Billiton including volume histogram

To work out the actual number of BHP shares traded in the above chart you need to use a multiplying factor of 100. This is because charting programs will struggle to display the full number of shares traded as it is often very large. So charting programs will divide by a factor of 100 or even 1,000 in order to keep the numbers on the vertical scale manageable. It should also be noted that the actual number of shares traded is of less importance than the direction in which the volume is trending.

Hence the use of the histogram which is highly suited to showing the ‘Rate of Change’ of volume. Again, chartists are more interested in the rise or fall in the trading volume than they are in the actual amount of shares that are traded during a particular trading period. Interpreting volume is a relatively easy matter as it either supports the direction of price movement or opposes it…

• Rising volume & rising price => Strong Bullish signal
• Falling volume & rising price => Weak Bullish signal
• Rising volume & falling price => Strong bearish signal
• Falling volume & falling price => Weak bearish signal

It is also worth noting that the importance of trading volume has become less significant in recent times because of…