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Using volume to identify trading opportunities

By Christopher Beauchamp - IG Market Analyst

Date: Thursday 28 Aug 2014

Using volume to identify trading opportunities

For many traders, price is only one element of a trading decision.

A price can be rising, but if the volume (a measure of how much an asset has been traded in a specific period) is declining, then the move may not have much long-term momentum behind it.

For every buyer there must be a seller, and vice versa.

The clash between buyer and sellers creates the market momentum, and spotting increases in volume can provide interesting trading opportunities.

A rising trend in a price and a simultaneous rise in volumes is a very positive sign.

Meanwhile, a rise in volume but no discernible increase in the price can send a signal that there is a potential news announcement on the way.

Increases in volume frequently occur ahead of a trading announcement. Buyers will look to take a position in a stock ahead of potentially positive news, while sellers will be looking to cut down their holding or eliminate it altogether if they believe that the figures will be poorer than expected.

The list below shows the stocks with the largest increase in volume on 27 August versus the average for the previous 30 days:

Northgate 592%
Perform Group 498%
Regus 366%
Merlin Entertainments 323%
James Fisher & Sons 275%
Foxtons Group 267%
Synergy Health 195%
Grafton Group 194%
Crest Nicholson Holdings 180%
United Utilities Group 163%
Bwin.Party Digital Entertainment 163%
St Modwen Properties 130%

Foxtons, Grafton, James Fisher and Regus immediately stick out from this list as they have issued results this week, while Perform and Bwin.Party numbers are due on Friday.

United Utilites is likely to have been traded on the fact that water sector regualtor Ofwat is expected to publish draft determinations of new regulatory pricing rules on 29 August.

Crest Nicholson and St Modwen have both issued their interim results recently but there has been plenty of trader and investor interest in the property sector of late, especially this week with Foxton's warning on short-term prospects.

As it is still the August holiday season, when market volumes are traditionally lower, some of these increases in volume may be more marked than normal, but they still provide a useful list of trading ideas.

Ideally, rising volumes should occur over a broader period than just one day, so the names above should be used as a starting point, with other fundamental and technical analysis being used.

However, when navigating the mountain of news available in the stock market, a scan of these 'volume leaders' can be very useful.

Christopher Beauchamp - IG Market Analyst


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