A little bit about volumes and the master of all averages

15 בדצמ׳ 2022

So, let's refresh our knowledge from the previous posts (read part 1 and part 2 at the links):
- The chart is based on the data from the tape;
- The X-axis is the time scale, and the Y-axis is the price scale;
- To avoid having to analyze a huge number of trades, interval charts were invented for convenience;
- The most popular chart type is the Candlestick chart;
- The candlestick consists of a body and shadows (upper and lower). The body is drawn at the open and close prices of the interval. The shadows are built by the maximum price (high), and the minimum price (low);
- The time interval for one candle is called a time frame. The smaller the time frame, the more detailed information we get about the price changes.

In addition to information about the price dynamics, from the stock chart, we can get information about the dynamics of trading volume. These are bars that we see below the candlesticks. They are also drawn on the basis of information from the tape. Let's return to our example:
FB $110 20 lots 12/03/21 12-34-59
FB $115 25 lots 12/03/21 12-56-01
FB $100 10 lots 12/03/21 12-59-12
FB $105 30 lots 12/03/21 12-59-48

If you add up all the lots of trades in the interval from 12-00-00 to 12-59-59, we get 85 lots. Then the lots need to be multiplied by the number of stocks in one lot, for example, 100. It turns out that 8500 shares changed their owners in 1 hour. This information is displayed as a bar below each candlestick.

My strategy does not use a trading volume analysis, but it is important to understand that increasing trading volumes are a sign of increasing attention to the stock. However, this attention does not always translate into higher prices. If there is negative news about a company, we will see both a drop in the stock price and an increase in volume.

What is constantly used in my investment strategy is the moving average. What is it? This is the average of the close prices of a selected number of candles, starting with the last one.

I use the average of the close values of the last 252 candlesticks. Why this number? The number 252 corresponds to the average number of trading days per year on the NYSE and the NASDAQ. That is, in fact, the average annual moving price.

Why is it moving? Because every day there is a new candlestick with a new close value, and it begins a new calculation of the average value of the last 252 daily candlesticks.

You can plot the moving average chart on a candlestick chart and see how far the current price has "run away" from the annual average price. I will tell you exactly how to apply this in investing in the next posts, and that's all for today.

Finally, I will ask you to reflect on one thought:
One who is true to the golden mean will always find something that someone else missed and give it to someone who is afraid to miss it.

See you in future posts.