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Trading volume is a key element to any technical trader, so for me it’s no different.  Paired with price, everything I need to know about a chart is right there in front of me.

It’s true that volume is usually needed to propel stocks higher for lasting moves.  I tend to think of volume as fuel – when there’s little of it left in the tank, it’s tough to get very far.

When stocks are on the decline, the same requirement is not in effect.  Downside volume is different.

A major reason this is the case is because buyers have bids placed in stocks at various levels below current prices at all times. If the stock begins to weaken, those buyers will often choose to simply cancel their bids.

This is in effect stepping out of the way to let the stock continue falling to lower prices where they can presumably buy it later.  When price accelerates lower, this creates a bit of an “air pocket” effect and we see price skipping levels on the way down.  As this occurs, price can continue lower without heavy downside volume.

On the upside, sellers might occasionally cancel their offers in a similar fashion, but usually there are greater motivations to sell than to buy, since most traders and investors buy stocks as their entry and sell as their exit (they don’t short sell).  The way I view it is that those traders who do intend to sell are more prone to leave a sell order in place – without cancelling it – which price can hit on the way up.

This is very different from the skittish behavior that would-be buyers exhibit when a stock is acting pretty weak.  It’s something to keep in mind the next time price rolls over and the volume doesn’t appear to be very threatening.

Trade Like a Bandit!

Jeff White
Take a trial to the Stock Pick Service to get my trades.

Follow @TheStockBandit

Years ago when I was in college on a golf scholarship, I read the book Golf is Not a Game of Perfect by Dr. Bob Rotella. I had heard a number of Tour players refer to him as their sports psychologist, and his previous book had gone out of print, so I was eager to devour this book when it came out.

Replace the word ‘golf’ with ‘trading’ and you will find a ton of useful concepts in it.

One of the ideas he introduced (which I also covered in my Trading and Golf series) was that one should have a “conservative strategy and a cocky swing.” By that, he means don’t take unnecessary risks with your style of play that can lead to big blowups.  Choose to take the percentage shot and then execute that shot with confidence.

Every trader must also do this. Pulling the proverbial trigger on a trade requires a certain level of confidence to begin with. Once that has been done, the next goal is to stay in that position while the trade runs its course. This second step requires conviction.

Conviction in Your Strategy

It can be a fine line to walk between confidence and cockiness, or between conviction and stupidity, so it must be done with care.

As traders, it’s imperative that we continue to set aside our motives and ensure that the price action takes precedence in our decision-making.

Erring too much on the side of caution leaves us sidelined indefinitely, unwilling to venture out into the market waters where both opportunity and danger reside. Likewise, erring too much on the side of conviction can end in disaster when we decide the market must be wrong to disagree with our assumptions and opt to stay in a losing position despite opposing price momentum.

In my experience as a trader, here is what conviction in a strategy looks like:

There’s a strong belief in the overall method, paired with an understanding that a safety net must be in place. There’s acknowledgement that conditions need to be suitable for the strategy in order to give it the best chance at working.

Amend Your Method

There’s nothing wrong with having a strong belief in your overall trading method, and I’d argue that that can be among the best traits a trader can have.

It’s important, though, to work hard regularly to identify and plug any holes in your method so that when it’s off, it doesn’t cause irreparable damage. Objectively review your trades in search of outstanding flaws or common themes among those which worked or failed.

Granted, it’s an ongoing balancing act to continually seek out ways to improve while still trusting in your method.  This part isn’t easy, so it’s somewhat of an art.  The key is to stick with what works until evidence surfaces which warrants an amendment to your method.

One last note. Anytime you miss an opportunity but followed your strategy, don’t beat yourself up over it.  This will happen! But stay alert for the next trade instead of constantly hawking the one that got away.

What keeps you on track in your trading? Leave a comment below if you have something to add.

Trade Like a Bandit!

Jeff White
Take a trial to the Stock Pick Service to get my trades.

Follow @TheStockBandit