The General Rules of Volume

by Tyrone Villaluna of PSE Security Analysis (www.pseanalysis.wordpress.com) 2012 0! 01 " #0.1

To learn this subject better, it would be best if you have a background on the following: Chart reading Chart patterns What is volume? Volume is simply t$e number of s$ares traded. %t is t$e amount of s$ares t$at mo#ed from one $and to anot$er. Are there guidelines to follow about volume? &isted below are t$e four 'eneral rules of #olume accordin' to (arold )artley from t$e boo* 'Profits in the Stock Market ' 1. +$en #olume tends to increase durin' price declines, it is a bearis$ indication. 2. +$en #olume tends to increase durin' price ad#ances, it is a bullis$ indication. -. +$en #olume tends to decrease durin' price declines, it is bullis$. .. +$en #olume tends to decrease durin' price ad#ances, it is bearis$. %t s$ould be noted t$at t$e abo#e rules focus on t$e changes in volume. /urt$ermore, t$e said rules can be simplified into two rules. 1. +$en volume tends to decrease durin' price declines or ad#ances, it is an indication of possible change in trend. 2. +$en volume tends to increase durin' price declines or ad#ances, it is an indication of possible continuation. T$e e0planation $ere is t$at on decreasin' #olume, t$e demand or supply is 'ettin' wea*er t$us t$e current trend is wea*enin' as well. 1n t$e ot$er $and, increasin' #olume means demand or supply remains to be stron' w$ic$ confirms continuation of t$e current trend. To illustrate better, $ere is a sample c$art t$at e0$ibits t$ese rules.

1. T$e first trend depicted by 2312 s$ows a consolidation but an o#erall declinin' in #olume. T$is si'naled an end in consolidation. 2. T$e second trend s$ows an uptrend wit$ increasin' #olume. T$is s$ows stren't$ on t$e trend. -. T$e t$ird trend tries to introduce a downtrend but t$e #olume is low and declinin'. T$is ends up only as correction. .. T$e fourt$ trend continued t$e uptrend wit$ increasin' #olume. (owe#er w$en compared wit$ 2322, it 'enerally $as lower a#era'e #olume. A si'n of possible wea*enin' trend. !. T$e fift$ trend tries to introduce a'ain a downtrend but t$e #olume is muc$ lower t$an 23-2 su''estin' a #ery wea* force. 4. T$e si0t$ trend a'ain continued t$e uptrend but is now s$owin' a declinin' #olume. T$is si'naled a wea*ness in trend. Additionally, t$e a#era'e #olume is lowest compared to 2322 and 23.2. 5. T$e se#ent$ trend 'oes into consolidation wit$ #olume remainin' steady. Where can I see these rules in action? %f one is to loo* closely on t$e #olume c$aracteristics of most c$art patterns, t$ese #olume rules may become ob#ious. T$e followin' is a table of common c$art patterns wit$ #olume c$aracteristics, as well as some indications.

Sample Chart

Chart atterns Ascendin' Trian'le

Volume Characteristics Volume is declinin' durin' trian'le formation.

Indication T$e consolidation trend is about to end.

6escendin' Trian'le

Volume is declinin' durin' trian'le formation.

T$e consolidation trend is about to end.

7up and (andle (Top and 8ottom)

1n cup formation, #olume is a 9:s$aped. 1n $andle formation, #olume is declinin'.

T$e correction or consolidation durin' $andle formation is about to end.

6ouble Top or 8ottom

Volume on first bottom or top is $i'$er t$an t$e second one.

6198&E T1P; T$e uptrend is wea*enin' as s$own by declinin' #olume on t$e two tops. 6198&E 81TT1<; T$e downtrend is wea*enin' as s$own by declinin' #olume on t$e two bottoms.

/la' (=e'ular and %n#erted)

1n pole creation, #olume is $ea#y. 1n fla' creation, #olume is declinin'.

Pennant (=e'ular and %n#erted)

(ead and S$oulders (Top and 8ottom)

/&A); T$e uptrend durin' pole creation remained intact as s$own by declinin' #olume durin' fla' creation. %>VE=TE6 /&A); T$e uptrend durin' pole creation remained intact as s$own by declinin' #olume durin' fla' creation. 1n pole creation, #olume PE>>A>T; is $ea#y. T$e uptrend durin' 1n pennant creation, pole creation #olume is declinin'. remained intact as s$own by declinin' #olume durin' pennant creation. %>VE=TE6 PE>>A>T; T$e uptrend durin' pole creation remained intact as s$own by declinin' #olume durin' pennant creation. 1n t$e left side of left (?S T1P; s$oulder, #olume is T$e climb from left increasin'. s$oulder to $ead 1n t$e left side of $ead, wea*ened as s$own a#era'e #olume is lower by #olume. t$an t$e abo#e. T$e slide from $ead 1n t$e ri'$t side of $ead, to ri'$t s$oulder #olume is increasin'. stren't$ened as 1n t$e ri'$t side of ri'$t s$own by #olume. s$oulder, a#era'e #olume (?S 81TT1<; is $i'$er t$an t$at on t$e T$e slide from left ri'$t of $ead. s$oulder to $ead wea*ened as s$own by #olume. T$e climb from $ead to ri'$t s$oulder stren't$ened as

=oundin' Top or 8ottom Volume is a 9:s$aped.

=ectan'les (Top and 8ottom)

Volume is declinin' durin' formation.

s$own by #olume. =19>6%>) T1P; T$e uptrend wea*ened mid:way and a downtrend started from t$ere. =19>6%>) 81TT1<; T$e downtrend wea*ened mid:way and a downtrend started from t$ere. T$e consolidation trend is about to end.

!ow to use these rules? +it$ t$ose rules in mind, t$e trader can use #olume to determine if t$e stoc*@s current trend remains intact. Volume can be used to determine if t$e stoc* is in correction consolidation (declinin' #olume) or $as turned bearis$ (increasin' #olume). /i'urin' t$at out will $elp $im increase $is c$ance of 'ettin' a 'ood entry and e0itin' near top. Disclaimer: This tutorial is for educational purposes only. Following the rules discussed does not give an assurance of sure or maximum profit. :end: