Dan Passarelli - Market Taker Mentoring

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Traders who watch some of these videos sometimes ask Dan why he has these volume bars displayed on the chart here? Dan looks at volume and puts volume on the chart to save room so that he doesn't have have to tie up another indicator down lower.

But let's talk about why Dan looks at volume.

Volume can be very important when combined with the direction of the stock that day. Take a look at this chart here of biogen. There are many days like, for example, let's just start with this day (happens to be an earnings day) where there was high volume and the stock was up. Now, some people may call this 'up volume'. So the stock is up with volume, with higher volume, right? And what happened after that is there was a little bit of follow through.

Look at a couple of other examples here. Here is one where the stock is down on higher volume than we saw for the previous few days. And we got some follow through. Here's one, after a couple of days of up days, we have an up day on higher volume and we got some follow through. Now, it doesn't always work out that way, but there is something telling about it. And there's really two things that are important takeaways here. One is what I would call conviction.

Remember why stock prices go up or down? It's because there are more sellers than buyers at that price point is why stocks go down. And if they go up, there's more buyers than sellers. And so when there's a high amount of volume, there's a lot of buyers and sellers sort of fighting each other. But the buyers win out, so the buyers had a lot more conviction and they took out all of the people who wanted to sell at those prices. And so therefore, there's not as many sellers there to push the stock back lower.

The second thing is almost a restatement of this idea of conviction. It's kind of following the smart money a little bit. We work under the assumption (which has some truth to it, but it's not 100% universally true); that professional traders are really smart people, right? Dan's been in this business for 29 years and he can definitely give some counter examples to that. But not-smart traders don't tend to last very long. And so we can kind of follow the smart money a little bit when we look at, like, up volume, the stock is up on high volume. That could be a better time to buy because there's all this conviction. Somebody who's trading a lot of money (pushed the stock up and took out all of those sellers) might be a good reason for that stock going lower here too.

When stock prices change on low volume, that doesn't mean conviction or anything. That means, basically nothing. It's about conviction. It's about following the smart money.

Word of caution: Any trader should always try and get their trade ideas by observing and following traders that know what they're talking about (and are successful traders themselves).