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SUBMITTED BY: NEERAJ NAMAN MBA (GEN), 2013 A-37 SAPM-2
When volume is low. The higher the volume during that price move the more significant the move. the professionals tend to get overly excited about a possible turn in market direction. and it is used to suggest that the bulls are in control of the momentum. A large number of advancing issues is a sign of bullish market sentiment and is used to confirm a broad market uptrend. It simply indicates enthusiasm or lack thereof for an issue and it has nothing to do with the price. Market breadth A technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. To confirm a market turnaround or trend reversal.How to interpret the share market with Volume indicators Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. Positive market breadth occurs when more companies are moving higher than are moving lower. and thus a trend reversal may be well on the horizon. it is a sure indicator of weakness in the trend. but gains and losses are big. has conviction. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. a sector or a single issue.Question: . If they do not. Traders will specifically look at the number of companies that have created a 52-week high relative to the number that created a 52-week low because this data can provide longer term information about whether the bullish or bearish trend will continue . Volume is the indicator at which chartists constantly look to determine whether or not a move in the markets. a disproportional number of declining securities is used to confirm bearish momentum. Conversely. the technical analyst must determine whether or not the measurements of price and volume momentum agree with each other.
when demand is more than supply the price will rise. Therefore. the market will go up and vice versa.e. Market thickness is basically the difference between the price that has been bid by the buyer and the price at which the seller wants to sell the stock. Since few transactions take place in a thin market. Market thickness (which is an index of demand) matters in determining quality only up to a certain level.10 is the market thickness. the difference of Rs. The low number of bids and asks will also typically result in a larger spread between the two quotes. if there is more number of buyers in the market than the sellers. Therefore. This concept is based on the traditional concept of demand and supply on which the stock market is based i. there will typically be a material impact on prices. When a market is thick. Thin Market A market with a low number of buyers and sellers is called a thin market. potential buyers and sellers may find it difficult to transact in a thin market. For example: If the buyer wants to buy a stock at the price of Rs. prices are often more volatile and assets are less liquid.Market thickness It is the difference between ask and bid price.1000 per share and the seller is ready to sell it at the price of Rs.1010 per share. transactions that occur on the exchange will be very similar in price. resulting in more buyers than sellers or vice versa. A thin market has high price volatility and low liquidity. Thick Market A thick market occurs when there is high volume of trading on a particular exchange. Since few bids and asks are quoted. More thickness means there are more chances of trading. If supply or demand changes abruptly. It acts as an additional discount factor in evaluating the future when the buyer to seller ratio is relatively low .
While some technical indicators are more popular than others. a trader will use a price below a downward sloping average to confirm a downtrend. a thin stock market often means that a market slowdown is on the horizon. few have proved to be as objective. reliable and useful as the moving average. 1) Trend Identifying trends is one of the key functions of moving averages. but their underlying purpose remains the same: to help technical traders track the trends of financial assets by smoothing out the day-to-day price fluctuations. Moving averages Technical analysis has been around for decades and through the years. which means that they do not predict new trends. traders have seen the invention of hundreds of indicators. this indicates a lack of investor confidence in the market. or noise By identifying trends.Market Considerations People should be cautious when buying thin stocks because they may be harder to sell in the future. measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. moving averages allow traders to make those trends work in their favor and increase the number of winning trades. As it is given in Figure 1. Some of the primary functions of a moving average are to identify trends and reversals. Since the stock market is based on investor expectations and leads economic activity. a stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. but confirm trends once they have been established. which are used by most traders who seek to "make the trend their friend". Conversely. If a market is thin. Moving averages are lagging indicator. Moving averages come in various forms. .
Looking at moving averages that are created with a period of 20 to 100 days is generally regarded as a good measure of medium-term momentum. Conversely. In Figure 2. . A 15-day moving average is a more appropriate measure of short-term momentum than a 200-day moving average.Figure 1 2) Momentum If one pays close attention to the time periods used in creating the average. One of the best methods to determine the strength and direction of an asset's momentum is to place three moving averages onto a chart and then pay close attention to how they stack up in relation to one another. medium-term and long-term price movements. when the shorter-term averages are located below the longer-term averages. In general. strong upward momentum is seen when shorter-term averages are located above longer-term averages and the two averages are diverging. short-term momentum can be gauged by looking at moving averages that focus on time periods of 20 days or less. the momentum is in the downward direction. as each time period can provide valuable insight into different types of momentum. The three moving averages that are generally used have varying time frames in an attempt to represent short-term. any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum. Finally.
The falling prices of an asset will often stop and reverse direction at the same level as an important average. 4) Resistance Once the price of an asset falls below an influential level of support. Many traders will anticipate a bounce off of major moving averages and will use other technical indicators as confirmation of the expected move. As it is clear from the chart below. it is not uncommon to see the average act as a strong barrier that prevents investors from pushing the price back above that average. such as the 200-day moving average.Figure 2 3) Support Another common use of moving averages is in determining potential price supports. Figure 3 In Figure 3 you can see that the 200-day moving average was able to prop up the price of the stock after it fell from its high near $32. this resistance is .
Many short sellers will also use these averages as entry points because the price often bounces off the resistance and continues its move lower. . Figure 4 5) Stop-Losses The support and resistance characteristics of moving averages make them a great tool for managing risk. The ability of moving averages to identify strategic places to set stop-loss orders allows traders to cut off losing positions before they can grow any larger. Figure 5 As it is clear in Figure 5.often used by traders as a sign to take profits or to close out any existing long positions. Using moving averages to set stoploss orders is key to any successful trading strategy. traders who hold a long position in a stock and set their stop-loss orders below influential averages can save themselves a lot of money.
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