The total number 1 indicator for trading individual stocks (which is just like the inside information) is VOLUME. VOLUME, when analyzed together with PRICE action, will give you more info than every other single indicator, hands down.
The simplest way to understand why VOLUME will be the primary indicator would be to remember your Economics 101 class. You could possibly remember the concept:
Prices are an event of SUPPLY & DEMAND
Within the currency markets, supply is generally fixed. That is certainly, the quantity of shares available for trading any given stock (often known as the float) is commonly a fixed number. It rarely changes.
Demand however fluctuates. Fundamentally, in stocks, if demand increases, prices progress. Where does the requirement for stocks result from in the stock market? By most estimates, 75% to 85% coming from all activity in the US currency markets comes from institutional and professional investors (not Mom & Pop, and not little day and swing traders!). The institutions include the mutual funds, hedge funds, insurance providers, pension funds, charitable trusts while others that control billions and vast amounts of dollars.
It's these institutions that can cause the demand. Precisely what does VOLUME have to do with any one of this? VOLUME (the volume of shares traded in a with time frame) could be the only footprint left by these institutional investors since they enter or exit a standard. Therefore VOLUME may be regarded as the purest evidence of need for certain stock.
Let's check out why we should instead follow these institutional footprints: Let's repeat the XYZ mutual fund currently has $10 billion under management. This is simply not a unique number, with there being many institutions that basically manage over this. Furthermore, let's think that the XYZ fund has selected a regular that they can want to make 2% of these portfolio. We'll use VMW (VMware around the NYSE) for example:
Stock Price: $55.00 Average Daily Trading Volume:1.67 million shares
Meaning XYZ desires to buy $200 million worth of the stock or roughly 3.63 million shares. Most funds don't want to be over 5% or 10% of an stock's average volume on any given day therefore the XYZ fund will accumulate from 83,500 to 167,000 shares per day until they have acquired 1.67 million shares.
Only at that pace, the buying could take 11 to 22 trading days. Considering that an average of there are approximately 22 trading days inside a month, it may take the full month of shopping for everyday to accumulate the shares. But funds don't buy it all in consecutive days. They accumulate during their visit and then may wait a couple of days to see if the stock pulls back a little.
Put simply, it could take several months (or even longer) for a fund like XYZ to accumulate their position. Additionally, if XYZ has good performance as a fund, there can be new money getting into the fund, which may enhance the variety of shares XYZ should buy to keep up a 2% position.
So it's the buying action from the XYZ fund as well as other similar funds combined that drives the stock higher. The harder funds which can be accumulating in this fashion, the harder VOLUME and expense will rise.
