Questions re: Trading on Volume

[johntherevelato]

Just wondering what people's thought are on the following and if indeed there are any resources that might address some of the factors I've brought up.

I would consider a strong trading signal to be a stock that is exhibiting a significant increase above the average volume of trades, and a change of direction in price.

However, what about those occasions where there is no real change in volume but for whatever reason the share price is changing direction. Presumably this would then attract attention and the volume would then begin to increase.

[JayF]

I definitely agree with you in that higher than average volume brings importance to any price movement. A few things to keep in mind is how to determine average volume. Stocks are often seasonal in nature as earnings times often increase volumes naturally.

In most cases however using a 20 period MA on the volume is a good practice. It will effectively give you an average volume for the last month on a daily chart.

To create this in an eSignal chart, do the following.
[list=1][*]Click Chart Options --> Formulas --> Library --> VolumeMA.efs[*]Add a Volume study if it's not already there (Chart Options --> Basics Studies --> Volume)[*]Hold down Shift, and drag the VolumeMA on top of the Volume indicator.[*]Click Chart Options --> Edit Studies, and select the VolumeMA.efs from the Study menu at the top.[*]Select Scale Right at the very bottom of that window. This ensure that the VolumeMA.efs and Volume indicator are using the same scaling.[/list=1]

Here's a look at Blue Chip stock with these indicators added.

[johntherevelato]

OK, so the 20 day MA for volume gives a good barometer on trading sentiment. A longer time span might distort the shorter term picture.