Home » Blog » How To Pick Winning Stocks Using Volume

How To Pick Winning Stocks Using Volume

Swing traders are always keeping an eye out for ways to improve their trading. There are literally hundreds of analysis tools  and technical indicators to choose from when analyzing stocks for a swing trade.

Every week I get emails from people who claim to have found the “Holy Grail”  of technical indicators or a new trading tool that guarantees winning trades and higher profits while reducing risk.

Most Indicators Tested Do Not Help Trading Profitability

I got a trial membership to a website that had automated back testing of any strategy you could create. So I tested all of the popular indicators like; RSI, MACD, Stochastics, Bollinger Bands Etc. There are at least a 100 different indicators.

The tests were exhausting and involved 30 years of stock market prices. The results were totally unbiased and based on pure math so there was nothing to manipulate the test results.

And The Results Were:

I admit I was surprised by some of the results. There were indicators I really thought helped me with my trading and many things that actually did work to some degree. I will give you the most useful thing I found that actually did materially improve profitability.

Volume And Price

So the most interesting thing I did discover from my back testing results was the relationship of volume and price. The results showed that a volume increase without any news or earnings report that would give a reason for the stock to jump in price resulted in 78% of the stocks experiencing a large price change within 2 trading days of the volume spike.I know its not a ground breaking revelation that a large volume spike results in a large price change in the stock.

But that is not the most exciting part of the results. The best part is that out of that number of stocks with the volume spike, 8 out of 10 stocks remained at the new higher(or lower if the stock dropped) price level while only 2 stocks dropped back to the breakout level after 5 trading days.

How To Pick Winning Stocks Using Volume With Out News

Price and Volume Spike Without News and the Stock Rallies for at Least 5 Days

So what this means is that when volume spikes by a large amount and a stock begins moving without any outside news that would explain the move, the stock tends to either continuing advancing or at the very least stay at that new price level for at least a week.

When I tested a sharp volume increase that was a result of some news(earnings, merger etc) that impacted the stock the stock experienced a dramatic price increase roughly 85% of the time. But here is the key, only 3 out of 10 stocks remained at the new increased price level. So that means 70% of the time stocks went back to their breakout level.

How To Pick Winning Stocks Using Volume With News

Volume and Price Spike With A News Event

This tells us that when a stock moves either up or down when an earnings report or other fundamental news is released that is related to that stock, the stock has already made its move in anticipation of that event and will reverse direction very quickly and return to its original breakout level. So this basically buy the rumor sell the fact, meaning the stock already made its move.

How You Can Use This

So we can conclude that buying a stock based on a news event is not a very good idea, because by the time the news comes out its too late and the majority of the move has taken place and its going to be dropping in price very soon, within 5 days or less.

So the really interesting thing is that learning that a SHARP volume increase not based on a news event was by far the best time to enter a trade in the direction of the move because the odds are 20% or less the stock will decrease and result in a losing trade. This is pretty exciting news!

So How Much Volume Is Considered A Spike?

So the cutoff on minimum volume was at least 75% increase in trading volume as compared to the average of the last 5 days. So assuming the average of the the last 5 days was a million shares per day we would be looking for a minimum of 2 million shares to play it safe.

If you have access to the market during the day and simple stock scanner that will alert you to stocks that are having a large increase in volume you could just buy at the end of the trading day and hold for 5 days and exit. The beauty of this system is there is no guesswork . Either the stock does or does not have the volume increase that is not the result of a news event.

To check to see if its a result of a news event, a quick check on finance.yahoo.com will tell you.

Volume Is The Best Predictor

So what we can take away from this, is that using volume the right way is one of the best stock analysis tools there is. So to take advantage of this, use your favorite stock market screener (like finviz.com) that has a scan for sharp volume increases, then check to make sure there is no news event. Once you have confirmed there is no news, put in an order at the end of the day to buy at the market (MOC or Market On Close Order)

Just remember if the sharp increase in volume is accompanied by a news event, the odds are at least 70% its going to be a losing trade. I don’t care what Cramer or anyone else says, the odds are against you!

So if you don’t have the time or patience to do this, you can still take advantage of strategies like this by using a stock picking service like Jason Bond or Microcap Millionaires. This is one of their “bread and butter” strategies.

You can read my reviews here: Microcap Millionaires Review and Jason Bond Picks Review

If Penny Stocks are your thing, then you should definitely check out Microcap Millionaires.

Read my review of Microcap Millionaires

You can read all my reviews on stock picking services here:

Stock Service Reviews

If you are looking to open a brokerage account or looking for a better one, I wrote some reviews of brokers I have used and currently using.

OptionsHouse Review (Currently Using)

Scottrade Review  (Used when I first started)

See all of my swing trading strategies here.

If you have any questions feel free to contact me.

-Robert Walsh