Page 1184 - How to Make Money in Stocks Trilogy

Don’t Invest Blindly: Use Charts to See the Best Time to Buy and Sell 167

And the Survey Says . . .

Here’s another way to think about volume.
Let’s say you run a small clothing store and you have to decide what
clothes to buy for the summer season. In a trade magazine, you see a survey
that says “70% of women plan on buying a red swimsuit this year.” Your ini-
tial reaction might be, “Wow, I’d better fill my shelves with red swimsuits.”
But then you dig a little deeper and find out there were only 10 respon-
dents to that survey!
Would you still base your inventory on the opinions of 10 people? Of course
not. Now, if the survey was properly sampled, professionally conducted and
had 10,000 respondents, you might lend the results more credence.
It’s the same with volume. If a stock’s share price goes up 2% one day, that
doesn’t tell you all that much—until you also check the volume. Was it
unusually heavy? Or was volume well below average?
Without that information, there’s no way to understand what the price
change actually means. Are big fund managers showing real enthusiasm and
heavily buying the stock? Or is it just a head fake?
It still amazes me that so many financial news programs and publications
will just say “IBM closed 1% higher today” and say nothing about the vol-
ume. It’s essentially the same as a pollster saying “7 out of 10 women love
red swimsuits” without explaining how many people they surveyed (i.e., the
volume) to come to that conclusion.
They say real estate is all about “location, location, location.” You’ll find
that when it comes to using charts to see the right time to buy and sell a
stock, it’s all about “volume, volume, volume.” So to understand what the
changes in share price are really telling you, always check the volume.