The most important factor after price

Apurva Sheth
All that a market technician is concerned about when he is studying the charts is price. But there is a very important factor that one should consider after price.

Do you know which one is it?

No, it's not a moving average. Neither it's an indicator. (Don't worry if you don't know about them yet, I will talk about them in detail later) But those of you who know what a moving average or an indicator is and had that in mind, I'd like to tell you that's not the right answer.

These two or for that matter any other things (apart from the one I am going to tell you very soon) that you might have in your mind are derivatives of prices. In simple terms it means that they are directly dependent on price. They are statistical manipulations of price itself. These indicators will move along with the price, obviously there will be some lag with which they follow the price. The extent of the lag will be based on the time frame selected for example a 5 day moving average will be more responsive to the price than the 50 day moving average.

Nevertheless both are still calculated and dependent on price. Thus they do not give us any new information about the price or the trend. It's just the same old information processed and presented in a different way.

I have mentioned earlier that technical analysis is not about finding accurate price levels and targets it is about finding high probability trading setups. And high probability trading setups are nothing but stocks that confirms your view on multiple fronts. For example an upward trending stock might be moving along a rising trendline or may be moving well within the bounds of a rising channel. It may also be closing consecutively at higher levels. But all these factors do not make it a high probability setup simply because we are only seeing the same factor 'Price' in different forms.

For a setup to be considered as high probability it has to satisfy not only one parameter the 'price movement' but definitely something more than that.

And according to me the most important factor to consider after price is the Volume.

Volume is nothing but the number of shares of a security that trade hands over a set period of time. While many investors mistakenly think of volume as directional, with volume on an up day indicating buying and volume on a down day indicating selling. I would like to clarify that any share that's added to a day's volume tally is the result of both a sale as well as a purchase. So any share that's added to a day's volume tally is the result of someone buying and someone else selling. One can't happen without the other.

Volume is the most important factor after price that gives you insight about the trend and its likely direction ahead. Unlike the tools that I spoke about earlier volume is independent of price as its not calculated based on the price data. And that's why it becomes the most important element after price while trading.

Volume is nothing but the level of participation in a particular security. The level of participation shows the interest of market participants in that particular security. More the level of interest more is the strength of the ongoing trend. Lesser the interest lesser is the strength of the ongoing trend. Volumes can give indication well in advance about the change in trend. (More on this in my next letter)

You all are aware that I have been following a process when making recommendations. Volume has been an important part of that process. Over the last few months I have been fine tuning and testing these strategies to check whether they are valid or not. I am happy to say that they are valid and have made good money.

When I was testing these strategies I realized that having an additional volume filter would make a lot of sense when I would be recommending stocks to a couple of hundred of individuals as against a few institutions that I was recommending earlier.

I realized that there will be many people who will be buying/selling stocks based on my recommendations. In case the stocks that I recommend are not fairly liquid then the impact cost would be high. That's why I use a specific Recommended Price at or below which one should buy shares.

Although it might seem very tempting and one would like to buy the stock at market rate as soon as one receives the recommendation but let me tell you that's not the right way to trade. You should wait patiently for the stock to touch your buy level. I know that many people keep busy during the day and can't keep a watch on minute by minute basis on the stocks. Therefore, the best way to do it is to keep a limit order with your broker and let the stock come to your price instead of you running behind it. It would only take a couple of minutes to place a buy order. I'm sure those aspiring to become traders can spare that much time every day to place orders with their brokers.

Next concern was that all the people acting on my recommendation may not be able to get a timely entry or exit because of lack of depth in that stock. This means that even if after a certain buy or sell level has triggered one may not get an entry or exit from the stock because there aren't enough participants to give a counter-offer to them. This means there aren't enough sellers to sell when you want to buy and vice-versa.

To solve this problem I decided that I will have an additional filter based on volumes. So I set a rule that I would be recommending only those stocks whose value of last 14 days average volumes as on the date prior to recommendation is more than Rs 4 crore.

This means that I will recommend only those stocks whose average traded volumes of last 14 days have been worth more than Rs 4 crore. The logic behind taking last 14 days average against only considering the date prior to sending out the recommendation is to smoothen out the impact of a large trade that might have been executed on that day. By doing this we can ensure that the liquidity is fairly good across periods rather than only on a single day.

During this period I also observed that stocks which have an average turnover worth more than Rs 4 crore have fairly decent depth and liquidity. So I have kept this as an initial filter for the time being however, I may revise this level either up or down based on the learning that we get from experience. I would like to reaffirm that this is a continuously evolving process and our intention is to improve it further as we progress ahead in this journey.

You have seen how volume played an important role in improving this process that I have. In the next article I will tell you how it gives us wonderful insights about the trend and its likely direction going forward.

What is the most important factor after price that you consider while trading? Share your views in the Club or share your comments here.

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17 Responses to "The most important factor after price"
29 Mar, 2015
Correct and very useful strategy Sir. I am a small and new trader. Volume and Price reveal the further movements of the stock. Please indicate from where the 14 days total volume and 5 days average price so that we can easily ascertain the further movements of the stock. Like (3)
B Y K Rao
10 Mar, 2015
Vollume traded is important, high volume indicates liquidity, If the price moves up along with high traded volume, indicates future higher prices.The cumulative difference is indicated by ON BALANCE VOLUME ( OBV ), bykLike 
07 Mar, 2015
Volumes in terms of traded in 14 days worth 4 crore is good criteria to think of a stock trading Like (1)
05 Mar, 2015
PPE value Of the scrip plus peer group is also a vital indicator for purchasing or selling the scrip.Like 
PGK Nair
05 Mar, 2015
Interesting points.Like 
Arvind Kumar Vaish
05 Mar, 2015
a very important point you have mentioned. i would like to know that volumes includes both purchases and sellings. Sometimes IN THE VOLUMES there might be more selling in the stock and at another time more buying and less selling. How would you interpret that.Like (1)
05 Mar, 2015
Thanks for all the advice..can we get into some action now. The first recommendation per the mailers was the 3rd Mar..i haven't recd anything in my mail as yet. When can we expect this to be in. ThnxLike 
05 Mar, 2015
A nice way to explain price-volume relationship in technical analysis. Thanks Apoorva. However, the remark that volume is totally independent of price may not be entirely correct. Economics deals with price elasticity and inelasticity in relation to supply and demand. For some scrips the volumes tend to fall as the price rises but for others it may not be so (the frenzy that leads to spike in the price of a scrip after News/recommendation by Equitymaster/TV analysts etc). Instead of an arbitrary Rs 4 crore trading value will it not be better to monitor % of free float that is being traded? If 1000 shares of MRF are traded it would be 4 Crores as the scrip is at around Rs 40000/- So even a small change in volumes has a big change in price. Penny stocks are traded in thousands or Lakhs without making much impact on price. Like (3)
05 Mar, 2015
Yes your strategy is very good one and the article is very informative to follow become a successful trader. But many of us time is an important factor to observe the strategy so I request you give your views precisely and point wise so that quickly we can follow your expertise. With regards, Like 
04 Mar, 2015
Your article made interesting reading. My understanding is that the scrip volume is the highest on the day the price peaks out. Volume includes both buyers and sellers. Subsequently the price starts following with buyers exiting and more sellers coming in. Vice versa applies before the price reaches a peak.Like (1)
04 Mar, 2015
Right you are. Thanks for pointing. We shall keep in mind to check the volumes also. Above average volumes validates the trend.Like (1)
04 Mar, 2015
Hi, So if you recommend a stock at Rs. 100/- and the price is Rs. 95/- which should not enter at lower price but only enter when the price touches Rs. 100/-??? ThanksLike 
04 Mar, 2015
Hi, Thanks for pointing out that volume plays a major role. But is it not better to just take the number of shares traded, instead of taking the value of shares traded? That is, instead of saying Rs.4 crores, is it not better to say, for example, 400000 shares? Regards, RangarajanLike (1)
deepak chhabria
04 Mar, 2015
Very true, I also study the same parameters . The probability of success goes up if we follow these two parametersLike (1)
04 Mar, 2015
tired of lectures..and theories..Let us get in to action...Like (1)
04 Mar, 2015
You are correct is saying Volume plays an important role in identifying and confirming Trend. Apart from Rs 14 crore are you also planning to use any average volume. Usually I also check the harmonic pullbacks of price towards MA and avoid charts that are too choppy as it will be more unpredictable to apply TA on those charts as often times price will not respect TA in such scenarios.Like 
TS Padda
04 Mar, 2015
Volume along with Price definitely tends to reveal a lot about the movement. However, in considering volume, the buyers and sellers at every price also must be having a say. Can you throw more light upon this aspect of volumes? ThanksLike 
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