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Technical analysts use Stock Market Trading Software to perform technical analysis or charting as it is also commonly called. These charting tools are very helpful in providing information on momentum, direction, historical relevance and other good information that can go into making a trading decision. For the new trader it is important to note what is meant by technical analysis and how it is different from fundamental analysis, which is another commonly used stock analysis method.

Fundamental analysis, as the term suggests, relate to the fundamentals of the company in question. It has to do with its revenues, earnings, stock price in relation to its earnings, the company’s financial and management stability, its market capitalization and other such fundamental data that relate to the company and many times also to the industry that the company is in. Based on fundamental analysis, we can determine whether a stock is attractively priced, evenhandedly priced or it is overpriced. And, we would make the decision to purchase or sell based on that determination.  Fundamental analysis is more of a qualitative analysis of the company and its stock price. More often that not long-term investors perform fundamental analysis and make their investment decisions based on the results of the fundamental analysis. The drawback of fundamental analysis is that it only looks at the companies numbers and does not look at other decimal aspects such as price movement, accumulation, short and long positions, stock price historical performance and other such data related items.

That is where technical analysis comes in. Technical analysis uses stock market trading or charting software to plot the historical stock price movement in relation with time. The most basic version of this is what comes up when we click on “charts” from a stock ticker’s main menu. Depending on what level of chart one uses, one can overlay this basic chart with a number of other significant and relevant information that can tell you whether the bulls or the bears are in charge (meaning the stock price is trending downward due to bear pressure or trending upward due to bull activity), the moving averages, the trading volume information, the periodic highs and lows, the resistance and support levels and many other relevant and important factors that enable a technical analyst to make a judgment on which direction and how swiftly the stock price is likely to move in the near term. Hence, this type of analysis is more used by short-term and options traders who typically want to get in and out of the market quickly. The drawback of this method, as one might expect, is that technical analysis does not look at the fundamentals of the company at all. It is not concerned with the company’s performance and financial numbers.

Needless to say, as you might have guessed it, neither method used alone is a good way to make trading or investment decisions. One can make a purchase decision looking at the charts only to realize that the company declares terrible results in the next earnings release. Similarly, one can look only at the fundamentals and make a buying decision only to see that the stock price has reached a long-term resistance level and rebounded downward.

Moral of the story: Do not only rely on stock market trading software to make your purchase and sell decisions. It always helps to look at the fundamentals too.

 Traditionally, not a lot of traders are paying attention to the volume based technical analysis. Historically, majority of indicators were developed to examine price movements. There are several reasons why fifty years ago retail and professional traders’ main focus wad price analysis only.

First reason is the volume gaps. Half of century ago, the stocks were not trader as actively as they are traded today. Therefore, intraday volume data on many stocks had gaps – when volume equal zero. When you apply technical analysis to price you might see nice smooth picture, yet, when similar technical indicators are applied to volume that has gaps you will have disordered picture which make extremely difficult to pull out something logical from it.

Second reason is the low volume. When it comes to the low volume stock, as a rule it is a common to see huge number of volume spikes. One trading period you might have volume equal 10K, another trading period it could be 50K which is 400% rise. The same as in case with volume gaps, such volatility in volume makes it difficult for analysis.

Fifty years ago the main technical analysis was done on the regular data and indexes and exchange were only the trading car that had more or less stable volume flow that could be analyzed. However, at that time nobody provided volume for indexes and exchanges and this is the third reason why volume analysis was not very favourite at that time.

I think, the first serious input into volume analysis was prefabricated by Marc Chaikin. At that time, he already understood the importance of volume analysis. Accumulation/Distribution, Chaikin Money Flow and other volume based technical indicators developed by Marc Chaikin were directed to measure the flow of the money – whether the investors coming into the market or they are leaving, to measure how actively stock or index was traded during an up-move or during a decline – whether enough money were injected into stock to make it overbought or whether enough were pulled out to make a stock oversold.

By its nature volume grants to track and measure the trading activity and reveal changes in this activity. Correct interpretation of volume analysis grants seeing the moments of sentiment changes – when investors stopped injecting money into stock and started to pull them out or when they do not sell any more in panic and started to buy.
Nowadays there are no problems with volume data. Trading activity of stocks is much higher than fifty years ago. Volume data for indexes (S&P 500, NYSE, DJI, Nasdaq 100, etc) became available. Due to the average high trading volume there is much less stock that have volume gaps and spikes. All of this has prefabricated volume analysis acquirable to the wide range of investors.

Professional and institutional trades already started to use volume based technical analysis in junction with price based technical indicators a decade ago. More and more trading systems base their signals on volume indicators. NYSE volume was the first volume from the group of indexes and exchanges that professional analysts started to pay attention to. Now, volume of S&P 500, Nasdaq 100, Nasdaq Composite indexes has become equally popular.

Still, as was mentioned in the beginning, majority of retail traders, historically are stuck with price analysis and they base their trading decision solely on price technical analysis. The question is why? Trend is always described by price and volume and if you examine price only you see half of the picture only.