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Why Trading Volume Tells the Story

“Michael, can 24 million be wrong?”

The point here, phrased as a question and not to be dramatic, was LITERALLY the moment I went from a trader who knew how to trade to a trader who knows how to execute and make money as a trader. 24 million means 24 million traded shares of a stock that day. In this case, it was 6 minutes to the NYSE close and I was passing by the office of one of the consistent top 5 traders and sharp guy all around that rarely came in to the office and when in was sort of a reclusive type…but legendary. I asked him what he was taking overnight and he said that he had a huge position in JSDA (NASDAQ…look it up). I had heard that symbol from time to time. Never traded it and kept walking but noted the position.

Market opened up modestly that day and I did my thing. Before lunch I checked the symbol JSDA. JSDA was up over $2 (21% on day) and had traded 4 million shares when normally traded at best 1mm a day, keeping in mind that was still before noon. Then went to look at previous days chart to look at volume, range and price action to see the day before and saw that JSDA traded 24mm, again keeping in mind that it doesn’t get to 1mm on good day.

Appreciating a great trade I went by his office not only to say great call but the question here was why and how? Looked at me and said, “Michael, can 24mm shares be wrong?” But the realization here was that JSDA, the day before with the 24mm traded, was up almost $2 that day also. Most traders would consider that “chasing/paying up or even think the meat of the trade is over.” Mark thought the OPPOSITE. Bottom line is volume tells the story and here’s why every trader should adopt that mantra before anything….

Market conditions had changed, this is back in 2007, and day trading, my forte, was all but obsolete and I needed to add an additional style to my trading so I befriended this man with my passion, track record and enthusiasm (luckily innate for me). I offered to clerk for free just to learn this style from the best. My firm didn’t want me to clerk being as I would be giving up my potential P&L to work for nothing. The stipulation here was that I would trade my own account as well. So I traded both accounts at once.

Here was my job description and please note that I have done this every day since and will do this this afternoon and every day after: Starting at 2pm, I had a sheet of paper with two columns on it. A long and short list where I had to search through multiple queries, both proprietary and common websites. Nothing special. Based upon simple criteria and my professional opinion I had to put the top stocks that were trading the most volume, on a percentage basis, relative to that of its 5 day and 10 day average or VWAP (a stochastic that can be found on most platforms).

If the stock had material news then I would put a star next to the symbol. A KEY point here and to remember that if a stock has huge volume, range and a positive trend to that days performance with NO news it is considered a better play because of the “buy the rumor/sell the news” cliché.

Now, after adopting new criteria and rules for my stock selection process, and once again, it’s very simple and I didn’t create this, it all boils down to discipline whatever you do and the biggest traders out there trade stocks with VOLUME/RANGE/RELATIVE STRENGTH. The disbelievers claim that this may lead to the “crowded trade theory” and I understand. It happens and those who go contra do make money. But it’s the hard way and shorting these kinds of plays is a low percentage play and by the time one makes good money in it they have already tried to go against the trend and therefore breakeven at best.

Heavy volume trades and active FX environments usually lead to sustained price trends and higher quality intraday momentum, but identifying these plays, whether you are in them or not pays another dividend and I call this a ‘Resumption Trade’. Meaning stocks/FX markets that are hot or in play tend to stay that way whether it is the next day follow through or the one day delay means greater edge and more so greater liquidity offering the trader a better out if the trade goes against you.

In conclusion, whether you make or lose in a particular stock or a sector understand that playing high volume stocks with range will always offer the short-term/intermediate trader greater advantages both on the winning and losing side. Volume tells the story.