The Importance of Volume Indicators & Not Fixating on Major Indexes

As a momentum trader, I rarely look at major indexes, but at small-cap names with high institutional or insider ownership. This is because small-cap names offer many advantages to traders. One being that they tend to move with a greater velocity than large-cap names. This is due to supply and demand.

Generally, retail traders follow the major indexes, while assuming these benchmarks reflect the entire market. However, this is often not the case. Just analyzing the major indexes limits your ability to make higher profits. This is not a problem for the hobby trader, but for the trader interested in making a living, this can become a major issue. Rather than limiting oneself to big name companies, retail traders should embrace every potential trade. Small-cap stocks that are not components of a major index rarely follow the same price action. Small-cap stocks often move in advance of the indexes and at times are not correlated, especially here in Canada.

Traders think that simply learning technical analysis will teach them how to trade, which is not true. Historically, stock market data was primarily price and time, volume was rarely included because there were only a handful of exchanges. The first charts had to be hand-drawn in the point and figure format. Candlesticks were not introduced to the western markets until the 1990’s.

Currently, there are a multitude of exchanges and alternative trading systems for matching buy and sell orders. Retail traders tend have no idea what is going on behind the scenes. A large number of institutional orders are now filled in dark pools and high frequency trading firms have become an integral part of the market.

Because of this, volume has now become a necessary indicator in fully understanding the intricacies of today’s price action. This has become an essential aspect of technical analysis not taught in most books.

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