Thursday, 2 May 2013

Basic Volume Theory

Basic Volume theory includes the following maxims:
* Increasing Volume with an advance is Bullish
* Decreasing Volume with a decline is Bullish
* Increasing Volume with a decline is Bearish
* Decreasing Volume with an advance is Bearish
* A Market Top is imminent when heavy volumes occurs with little or No Gain in the averages.
* Heavy Volume confirms the direction of price breakouts from a Support or Resistance Zones.
* An increase on heavy volumes after a previous substantial rally signals a "Blow Off" with an impending to a Reversal approaching.
* Heavy Volumes accompanied by an accelerating drop in prices confirms a "Selling Climax" and impending price reversal after the panic selling subsides.
* Low volume periods after upward price reversals reflect a Consolidation Phase before resumption of the Upward Movement.

In the science of Technical Analysis, Volume plays a role which is as important as any other basic indicator. An increase in the volume in conjunction with Stock price moves adds strength and momentum in the direction of the move. It reflects the market's confidence that the uptrend will continue in force, or its pessimism that the downtrend will.

For the market, declining volumes as the market rises is supposed to warn the end of a  BULL MARKET.

Likewise, sharp increase in volumes resulting in Selling Climax, signals the end of a BEAR MARKET.

An increase in abnormal volume can alert investors to coming price movements, Up or Down, before it becomes obvious to the overall market. Therefore, the market axiom "Volumes Precedes Price".

Historically, the majority of  BULL MARKETS have originated with at least two days within two-month period where upside volume is at least nine times greater than the downside volume. Investors who track volume and spot the two-day Exceptional Upside Indicator can out-maneuver other investors and earn excess returns by positioning themselves for the coming Bull Market.

The Daily Volume Indicator measures extremes in the Supply/ Demand relationship. If a Stock closes at the mid point of its trading range for the day, the indicator reflects no change. Closing Price above or below the trading range midpoint show an increase or decrease in the Daily Volume Indicator, respectively.

In constructing the Daily Volume Indicators, Technical Analysts take into account the day's volume, closing price, Distance between closing Price and the mid point, and the Trading Range.

These are just the basic characteristics of the Volumes, these must be read in conjunction with other commonly used indicators before drawing up any conclusion.

Source: Importance of Value in Technical Analysis - http://www.stocklinedirect.com

Quote for the day

"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger

LSL Market Review 02 May 2013


Colombo shares closed at their highest in 16 months today with improved activity levels. Several counters such as John Keells Holdings (LKR 250.10), Dialog Axiata (LKR 9.50), Seylan Bank (LKR 70.00), Textured Jersey (LKR 11.90) and Lanka IOC (LKR 28.00) reached their 52 week high prices today.

The market turnover was LKR 635mn. Top contributors to the turnover were Touchwood Investments (LKR 123mn), John Keells Holdings (LKR 99mn) and Lanka IOC (LKR 38mn). The actively traded counters were Touchwood Investments (LKR 5.70,-19%), Lanka IOC (LKR 27.70,+14%), Laugfs Gas non-voting (LKR 20.80,+5%) and Colombo Land & Development (LKR 50.90,+1%).

Cash map for today was 47%.

Foreigners were net buyers for the fourth consecutive day with net inflow of LKR 99mn. Foreign participation accounted for 11.5% of the market activity. The cumulative net foreign inflow for this year stands at LKR 9.3bn. Interestingly, out of the total of 78 market days this year, foreigners have been net buyers for 54 days (i.e.69% of the time).

Quote for the day

"All market movements are based on “two deep-seated and entirely natural emotions: the desire for gain and the fear of loss.” - Burton H.Pugh

Your Stock Trading Rules

One of the hardest things about stock trading is self-discipline. You have a set of rules you use for trading, whether you realize it or not. The hard part is sticking to those rules. For example, you may tell yourself that you will never buy a penny stock. Then one day you get a tip or rumour that is boasting about "the next big thing" in the stock market and you go ahead and buy that penny stock. One day later, you have lost 50% of your investment and you are mad at yourself for violating your own rules!

A good solution to the self-discipline problem is to write out your rules on a piece of paper. Better yet, make many copies of this paper with checkboxes next to each rule. Before you place a trade, make sure the stock fits within each of your rules and put a check next to them. That will help you stay on track! It may sound silly, but it is actually quite helpful. After all, we are human, and humans like to break rules!

In fact, one of your rules might even say, "There are no rules." There will be times when it's okay to break one or two of your rules because of a special scenario. You may find a stock that is a "sure thing" and you just have to ignore those couple rules that it violates. Of course if you get burned on the trade you will know why! Remember, there are no sure things in the stock market! There are no stocks that can guarantee a profit or a dividend. They can always drop in price or go bankrupt. So stick to those rules as much as you can!

Here are my rules:

1. Never put more than 1/3 of your money into one stock.
2. If no opportunities are found, stay out!
3. Avoid trading on Mondays. They have big drops sometimes.
4. Look at charts of the CSE to see how the market is doing.
5. Keep track of economic news schedules, such as Company announcements.
6. After a huge loss, take a week off.
7. Research your holdings once a week.


Here are some stock-picking rules used by other people:

1. Predictable growth in free cash flow
2. Rich in assets, with little or no debt
3. Low multiple of price to free cash flow
4. Generous returns on equity, coupled with a reasonable cash flow multiple
5. Insider ownership and shareholder-friendly management
6. Insider buying, especially by executive officers
7. Leadership of an important niche

Feel free to use these rules or modify them to suit your trading style. There should also be different rules for day trading, short-term trading, long-term trading, and so on. Also, getting an accountability partner will help you stay on track. Show them your trades, when you bought them, why you bought them, and when you plan to sell.

There's a popular saying , "Plan Your Trade and Trade Your Plan." That simply means, decide when you're going to buy and under what conditions you will sell, and then stick to your plans!

Best of luck to you in your trading endeavours!
Source: How The Market Works