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Every trader knows that market activity varies throughout the day. It's higher at the start of the working day, it's lower in the middle of the day, and it's higher again at the end of the day. We call it the time factor. You only see this on volume charts simply because when there is more activity, there is more volume.
Normalized Volume is based on the curve that volume produces in one trading day. Therefore it can only be applied to intraday charts. Generally volume is heavy in the morning and heavy in the afternoon at the approach of the closing bell. Volume usually steadily decreases from the morning until just after noon, and then it begins to increase again. MarketVolume has calculated the average curve (the average shape of volume looks like a bowl) for volume on each of our charts based on average trading days for the past 4 years. Based on this curve, we have 'normalized' our volume charts. When a chart is normalized, you can see whether volume is above or below average during any given moment. Without normalized volume, some important increases in volume would be washed out by the fact that volume is usually heavy in morning and afternoon trading.
In effect normalized volume is the volume where the time factor is reduced to a minimum.
Below we have some examples of normalized volume, and non-normalized volume.
S&P500, 11/21/2001 - 11/27/2001,
On this chart you can see some elevated activity at the end of November 27, but it's difficult to say if this is enough activity to cause a change in the market. It is simply too difficult to see if the volume in this chart does not represent normal volume.
Below you can see an example of the S&P 500 chart for the same period, but with normalized volume.
S&P500, 11/21/2001 - 11/27/2001, Normalized, VMA 60 min.
On this chart the volume looks totally different from the first one. Normalized volume gives you a clear picture of market sentiment without the time factor affecting the picture. With this tool you can really see when volume is above normal, and subsequently predict trends in the market.
Averaged Volume & Summed Volume are ways in which you can see the volume data. Averaged Volume is set by default and only applies to periods of 5 days or more. Averaged Volume is always based on one-minute volume ticks, and means that when you are viewing a 5-day chart (5-minute bars or ticks) each volume bar is the AVERAGE volume of FIVE one-minute ticks, or on a 15-day chart (15-minute ticks), each volume bar represents the average of 15-minutes of volume. Summed Volume uses the same principles as, Averaged Volume, but here we just add the 1-minutee volume ticks together and do not average them out.
Below you can see charts of the NASDAQ 100 during the period of January 11, 2002 to January 14, 2002. The left one uses, Summed Volume, the right one with Averaged Volume.
NASDAQ 100, 01/11/2002 - 01/14/2002, Normalized, VMA 30 min
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Summed
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Averaged
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Those two charts look the same except for one difference: the vertical volume scale. In the case of Summed Volume we have 1,027,900, and for the same point Average Volume is 205,500.
It really doesn't matter which chart you use, but we created averaged volume simply to make it easier to correlate 5-day to 60-day charts with 1-day intraday charts. This way you can select a level of Volume MA that you think will cause a reversal in the market, and the level will be consistent over all of the chart views.
Technical analysis is a very powerful tool and is a prerequisite for anyone who wants to predict financial market movements. The term "technical analysis" is a complicated-sounding name for a very basic approach to investing.
Simply put, technical analysis is the study of prices, with charts being the primary tool. So while it seems as if volume and technical analysis in general all have some forecasting abilities, none are foolproof. Used together, they can be quite helpful in your trading and investing, but should be seen, more than anything else, as helpful hints indicating a bias in the market.
Technical analysis attempts to use past stock price and volume information to predict future price movements. It doesn't look at income statements, balance sheets, company policies, or anything fundamental about the company. The technical form of analysis looks at the actual history of trading and price in a security or index. This is usually done in the form of a chart. The security can be a stock, future, index, or a sector. It is flexible enough to work on anything that is traded in the financial markets.
Here are a few Technical Analysis Tips that you should remember before starting your own analysis:
Be sure that you have modern professional tools to predict the market. Otherwise you are running behind the times and your portfolio will become food for other successful professional traders.
SPDRs, DIAMONDS , QQQQ or WEBS. Whatever you want to call them, they are grabbing an increasing share of interest and resources from sophisticated investors. The first index shares created by Amex were SPDRs, or Standard & Poor’s Depository Receipts.
Separate SPDRs were created for the S&P 500 and the S&P Mid-Cap 400. Trading in S&P 500 SPDRs was introduced in 1993, and the S&P Mid-Cap 400 began in 1995. Seventeen World Equity Benchmark Shares (WEBS) began trading a fixed basket of country securities in 1996. DIAMONDS, an index product based on the Dow Jones Industrial Average, began trading in early 1998.
Once created, the depository receipts trade just like common shares of stock. They can be traded in round or odd lots, and trade between the hours of 9:30 a.m. and 4:15 p.m. They pay dividends, but unlike stocks, can be shorted on downticks, which enhances liquidity.
The annual expenses on SPDRs are lower than expenses on most mutual funds, and the index shares are more tax-efficient. They appeal to short sellers because they can be shorted in falling markets when downticks occur, which can’t be done with individual stocks. They are highly liquid, and can be traded intra-day when sharp movements can occur, rather than only at the end-of-the-day price provided for mutual funds.
ETFs (also called index shares) track a specific basket of securities and trade continuously on the major exchanges like an ordinary stock. The pioneering big daddy of ETFs was the Standard & Poor's Depositary Receipts (AMEX: SPY) -- also known as SPDRs, pronounced "SSSpiders" -- which appeared in 1993. These were followed by the Dow Diamonds (AMEX: DIA), a basket of the 30 Dow stocks, and the NASDAQ 100 Shares (NASDAQ: QQQQ) -- a.k.a. Qubes -- which track the NASDAQ 100 stock index. Even though they've only been around since March 1999, Qubes are so popular, their daily trading volume rivals the companies on the New York Stock Exchange. (Today, only three companies on the Big Board traded more briskly.)
Another advantage is that ETFs can be shorted and bought on margin. I don't think that borrowing money to buy stocks is a smart way to invest, although in limited amounts by experienced investors it can be useful.
Perhaps the greatest benefit of ETFs is that they bring investors instant exposure to a diversified portfolio of stocks.
For many investors with a long-term vision who can embrace the benefits of ETFs without falling into the trading traps that accompany it, investing through ETFs can be quite rewarding to the pocketbook, and a superior alternative to mutual funds.
By trading the index, you eliminate concerns about picking the right company, balancing industry weightings, or incurring the cost of trading individual stocks. Best of all, you eliminate the traditional bias to the upside, so you can profit from both bull as well as bear markets.
QQQQ trade on the AMEX (NASDAQ: QQQQ).
The NASDAQ-100 Shares (QQQQ), an index tracking stock - is the first financial product created by the new NASDAQ-Amex Market Group. Now for the first time, the stocks of the NASDAQ-100 Index are trading as one equity, opening the door to innovative and exciting investment opportunities. Quote for Qubes: QQQQ
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