To start with, the definition of the trade volume index should be considered. The trade volume index is a technical indicator in trading, which measures the amount of money going in and out of a property or an asset. Simply put, the trade volume index tells whether a security is bought or sold. But due to its technicality in nature, the use of the trade volume index requires complex thinking and sound trading strategy. Professionals who are involved with day trading following intraday pricing data commonly use the trade volume index. Day trading professionals are traders who trade securities within the day. But that does not mean that “common people”, or people outside the trading world, should not get to learn how to use the trade volume index. To provide them with the basic start-up tool (knowledge), here are some tips on how to use the trade volume index.
- The trade volume index is a trader’s crystal ball. It has a predictive power when assessing a stock, especially on flat liners. Say, you want to purchase a stock on a break of a certain amount, but it has been idle for about 1-½ hours to 3 hours, you might want to think twice on making a call. The market being dull for hours before the breakout is a bad omen. But if you notice that the trade volume index ballooned after the 2 hour period, it could be an indication that the traders are accruing the stock at the ask price. Therefore, this momentum increases the likelihood that the stock will move when it clears the resistance.
- Know the direction of accumulation and distribution. First of all, you must be familiar yourself with the term, minimum tick value. The minimum tick value is a specified amount that is used to compare the rate of change, indicating whether the stock is in an accumulate or distribute pattern. The change is the price less the extreme price since the time the direction was last changed. If the change is more than the minimum tick value, then the direction indicates accumulate. If the change is less than the minimum tick value, then the indication is to distribute. If the change is less than or equal to the minimum tick value, then the direction will still be the last direction, accumulate or distribute.
- Learn to calculate the trade volume index. This will be very simple once direction is known. If the direction is to accumulate, then the trade volume index is the sum of the previous trade volume index and the volume. Otherwise, if the direction is to distribute, then the trade volume index should be the previous trade volume index minus the volume.
The trade volume index is very helpful for day trading people. Therefore, knowledge of investing in day trading should also be of benefit to many who are starting by learning to use the trade volume index.