Trading volume is an incredibly useful indicator for stock analysts because it can fit into any scenario and still seem plausible. When a stock price surges with low volume, experts say it's a "strong rise without giving a chance to buy." When it rises with high volume, they say it's a "strong rise supported by the power of transactions."
Diverse Interpretations of Trading Volume
The ways to analyze stock prices using trading volume are numerous. For example, if a stock initially rises with a large volume of trades and then falls, analysts may say that if the volume increases again when it rises past the previous high, it "absorbed the previous high’s supply and rose." If it drops after a volume surge, they might say "a large volume of supply at the previous high caused the fall." If the stock rises without much trading, it's evidence that "the controlling forces have been accumulating at the previous high." Conversely, if it falls without much trading, it's because "the power of trading was insufficient." Such interpretations align with the saying, "Volume precedes price in the medium to long term."
The Problems with OBV
One of the most well-known indicators using volume is OBV (On-Balance Volume), developed by Joseph Granville. OBV adds the volume on days the stock price rises and subtracts the volume on days it falls. A significant issue is that on days with no price change, the volume is completely ignored. For example, whether a stock shoots up with huge volume and then drops back to the previous day's close, or whether trading is suspended and the stock ends at the previous close, OBV remains unchanged. Judging the volume's "goodness" or "badness" based solely on the closing price is quite naïve since the closing price can be easily influenced by individual investors' orders.
The Limitations of the CLX Indicator
Another indicator using OBV is the CLX (Climax Index). This calculates the OBV of all stocks in the composite index, determines the difference between the number of stocks surpassing their previous high OBV and those dropping below their previous low OBV, and then plots a moving average of this daily value. If the composite index rises but the CLX falls, it's a signal that the index will reverse downwards. The problem is the difficulty in calculating this indicator accurately. The criteria for what constitutes "all stocks in the composite index" are vague. Should shipping funds listed on the exchange be included? What about small stocks with almost no trading volume? If not, then what are the criteria for exclusion? These decisions are left to the discretion of the person calculating the indicator.
The Limitations of Stock Indicators
The reason many supplementary indicators for stock analysis are so poorly made is that there are limited types of numbers on the chart. Using numbers like opening price, closing price, high price, low price, trading volume, and transaction amount, adding, subtracting, multiplying, and dividing to create significant numbers has its limits. These indicators can be interpreted differently depending on the situation and aren't always reliable.
Conclusion
Stock indicators using trading volume allow for various interpretations, but they aren't always reliable. Rather than blindly trusting these indicators, they should be used as reference materials while making comprehensive judgments from a broader perspective. Recognizing the limitations of volume indicators and setting cautious investment strategies is crucial.
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