Are Institutions Swarming?
Today brings us to traders’ third and final filter when determining the validity of a breakout: volume.
Volume measures the number of shares changing hands and reflects the level of participation. There is a wide variety of participants in the stock market, but ultimately, we can narrow them down into two groups: institutions and retail. Institutions include banks, hedge funds, pension funds, mutual funds, and the like. They are pooled money and have deep pockets.
By contrast, retail traders don’t pack much firepower.
Who do you want leading your breakout attempt?
The big boys!
We like to see high volume accompany a breakout because it signals institutions are entering the fray. Due to their deep pockets, they don’t buy stocks – they accumulate. This continued buying is the exact dynamic that helps create follow-through for breakouts.
Light volume breakouts carry higher failure rates because they lack institutional backing.
If you’re going to wait to see if volume increases, however, you can’t exactly buy at the moment of the breakout. Instead, you’d have to wait until the end of the day or the next day to allow time for the volume to rack up.
Doing so provides more confirmation but requires you to pay a higher price. Such is the tradeoff.
Chart of the Day
AMD Breakout With Volume Confirmation
There are many ways to determine whether you should pull the trigger on a breakout One of the confirmation signals some traders use is higher than average volume. Those big green candles on the volume chart can be a good sign that there are plenty of institutions on board with the breakout.
Earnings season continues in full force this week with a plethora of huge names. There will be no shortage of interesting story lines this week!
Video of the day
Understanding Market Volume
Today’s line up
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Watch the Stock, Options, Commodity and Forex Reports to help you prepare for the week.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses, and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involve a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax, and accounting advisors, to determine whether such trading or investment is appropriate for that user.