What can trading volume tell me about a stock?

I have discovered that if I do wish to one day start actually investing in a stock, that I should not invest in a stock that has a low daily volume. Volume refers to the number of shares of a stock traded during a given time period. Many websites have quoted a low daily volume as 15,000 shares or less. Often on these websites the notion of volume is discussed in passing but on closer examination I discovered that volume plays some part in the price a stock will be sold or bought for.

Just as with any product, an intricate system in relation to supply and demand is at work. If there are few stocks being sold each day then of course the price that can be requested per stock when sold is heavily controlled. One website I surfed even warned "Low Volume = Stay Away." Again, let me emphasize it's a basic supply and demand phenomenon. If there is a low interest in the stock, then there will be a lower volume traded and if there is a higher interest in the stock then a higher volume will be traded.

In addition several websites stated that some people mistakenly think that if the stock volume is very high there are more buyers than sellers for that particular given time period or vice verse. This seems very strange to me that people could mistakenly believe this because without someone to buy something who could you sell it to and without someone to sell something to you how could you buy it? So if you get yourself involved in a low volume stock then you may be stuck with it. It would be difficult for you to get out of this stock since you would need to find someone that is interested enough to buy it. That means if I purchased such a stock it could just be more like an investment that yielded no gains because my money would be put into a stock but never to be able to be touched.

So is it helpful for me to look at volume? Volume can be helpful first to see if there is enough interest in a stock, that can easily be deemed from the information I have already discussed above. But is there more to it than just that? Just select a high interest stock?

This seems like the first step as far as selecting a stock to invest in goes but to actually do some deeper analysis of the stock, you will need to pay attention to some trends or changes that take place involving the volume of a stock. Watching stock volumes and adhering to some "rules of thumb" will help you make some good decisions about stocks.

• When you see an increase in stock volume and as a result prices are being pushed higher or lower, we can assume that a trend has started. This trend will most likely continue. You can assume this if it's a new trend, if it's an old trend then there could be a dramatic change without warning.
  
• If there is an existing trend that has already been established but then there is a sudden volume spike, this could indicate that the trend is over and is likely to change.
• Within a trend that has decreased volume pushing the prices higher or lower, then that trend is most likely to end.
  

Maybe it's not even as easy as that. I am learning but very slowly. I think the next thing I need to do before going any further is to really try to understand stock charts. So far I have learned about Volume and RSI. I know by looking at these two indicators I can learn a lot about a stock. Maybe I will also explore some other indicators as a way to further my knowledge. I am reading a little bit about sophisticated computer software but some people warn that even the software is not as smart as an experienced pro and it's still best to go with gut instinct.

Anyway, I have decided to start to track the progress of several stocks and see what happens to them over the course of a few weeks or months even. Already I have learned a lot. From looking at Volume of a stock I can determine if it's a worthy and non-risky investment. The RSI can also give me insights into whether a stock is being over or under sold as well.

Stocks, Indicators, and the Price of Tea in China

While surfing the web the other day, I somehow managed to find myself on a Yahoo! Questions page regarding the topic of the origin of the phrase "What does this have to do with the price of tea in China?” In itself, this may not be of much interest, but I did start to wonder if the origin of this phrase did have to do with the possibility of everything being effected by everything else in this world. To a degree we must all adhere to this idea. That's one reason that I've made it a goal for myself to be better informed regarding financial related issues in this world. In a sense, I do want to start understanding what "this" (whatever the current this may be!) has to do with the price of tea in China! In a attempt to accomplish this mammoth goal, I've decided to begin exploration of some financial and stock market terminology. I groan at the sight of numbers and statistics but for some reason when I see a dollar sign (or any other monetary symbol for that matter!) I have a very different kind of reaction all together.

The first term that I ran across was "RSI." After doing some Googling, I found the full term of this acronym to be that of Relative Strength Index (RSI). Of probably no interest to anyone except me (and maybe a few fellow nerds), RSI was developed by the jack-of-all-trades J. Welles Wilder. Seems like this guy had his hand in every cookie jar at a a young age and then in his 30s had a large amount of money from the Real Estate business and nothing to do with it. But I'm straying from my point, aren't I? Even though the guy has had a hand in developing several trading systems as well as momentum oscillator. So what does the RSI show about a stock? The RSI is an analysis tool that uses two extreme values (in this case the highest and lowest selling prices of a stock) to inform when a stock is overbought or oversold. The stock is considered to be overbought when it reaches the upper extreme value and is considered under bought (oversold and undervalued) when it reaches the lower extreme value. For RSI, these values are set at 70 (upper extreme) and 30 (lower extreme). This number is calculated based on recent gains and losses of the stock. If the value is near 70 and is considered oversold then it's likely there will be a pullback. A pullback refers to a formerly upwardly moving stock suddenly "pulls back" and loses value.

When first reading about RSI, I felt it would be easy to buy and sell stocks. If a stock seems to be increasing in price, buy it and keep it for awhile and then sell it before the pullback occurs but it's not that simple. There is more to it than that! See any large rise or drop in a stock will affect the RSI in a way that would make it appear that it would be a good time to buy or sell. So many websites I consulted cautioned that RSI should only be referred to when it is considered in relation to other stock-picking tools.

Not Another Technology Blog...

Everyone seems to have a blog. Well, everyone except for me. So here is my go at it and I hope it's not a total disappointment to you. I guess I cannot say that I have *never* had a blog nor do I currently not have anything similar to a blog because I post from time to time on my Facebook wall or the notes section within the site, but I think it's not the same as having a real blog. Even the blog like LiveJournal website I had when I was studying for my masters degree couldn't really be considered a blog since it was private except for those I gave access to.

Actually, in the past I was set against blogs because I figured there was already enough "noise" out there on the web to not further pollute it with my own words. Still, at times there are things I'd like to share with others and hear their take on it. So why not take the plunge and give it a go? Less than a year ago I had considered having my own personal website (which I still may do and thus write about my experience here) but I guess that website will be more like a professional website related to my academic career. I need another space where I can be freer in my discussion of topics. Somewhere in between a professional website and a social networking site: this blog could be it.

My blog should have some focus or otherwise it will just be a meaningless collection of links, words, and regurgitation of others' words. Since I'm living in one of the big technology centers of the world, Taiwan, and my PhD work is greatly related to technology, that would be a good place to start. My PhD work's focus is on technology and the classroom, especially for Internet based individualized learning. So from time to time I may also post my comments or opinions related to the software that has been developed and released by students and researchers in my lab. I would also like to write a little bit about some experiments I'm conducting or ideas for future research as well. I can't guarantee that I'll not go off on tangents from time to time but I hope mostly to stay on topic.

I'll try my best to get my hands on the newest technologies and post my reactions and feedback along the way. I already have my hands on an iPhone 3G and the new Panasonic Lumix DMC-TS1. So you can expect some upcoming posts related to these two toys. I also have an interest in learning more about the stock market since if I keep pursing a future as an educator I need to find out a method to make some real money: being in education is most likely not going to guarantee this. Lastly I have plans to review certain software packages and social networking websites. I hope that there will be a few faithful readers of my blog and I welcome comments and questions related to my posts.