Monday, December 29, 2008

Low volume stocks

Low volume stocks can make it much more difficult to trade profitable. For that reason it is better to stay out of these stocks regardless of how the set up looks.

Volume should be looked at every time you place a trade. What volume does is tell you exactly how much of a given stock was traded during the day. Every number counts as 2 trade’s one buy and one sell. So if volume is 10 million it means 10 million people sold and 10 million people bought that day.

It is very important to look at volume because if volume is too low it could pose problems if you plan to make money trading it.

The first problem low volume stocks give you involves getting in and out. If there are only 40,000 trades on a given day you might find it very hard to get in especially at a price that you want to.

The second problem is similar, if a stock turns against you it could be hard to get out. Falling price on a low volume stock could make a crowd of sellers with no buyers around. By the time you get out you could have a loss so far under your original stops that, you would be hurting.

The last way low volume stocks work against you is the mere fact that you can’t use the volume to help you. Normally you can use volume to help determine the strength of a price action. High volume on an up day means that the stock is likely to keep going up in the short term.

If volume is low to begin with however, it makes it harder to tell where high volume and low volume are. No one is trading the stock anyway.

So what is good volume? Every trader has a different opinion, but I believe you should be able to find a stock that is trading at least 1 million shares per day. That should allow you to move in and out pretty easily.

As your account gets bigger however you may want to move the bar up. Only trade stocks with more and more volume. Just remember to keep volume in mind the next time you make a stock trade.

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