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Stock traders are always on the lookout for ways to improve their trading. There are hundreds of different Stock Market Analysis Tools to choose from when analyzing stocks and the stock market in general.

Each week I get emails from around the world advertising new and improved technical indicators and trading tools to help you increase your percentage of winners, increase the size of your winners and decrease the number of losing trades and the size of each losing trade.

Many Indicators Tested Do Not Improve Trading Results

About ten years ago I was working with a professional fund manager who had a Ph.D in statistics and was a true computer wiz.

We worked together with different back testing software programs that gave us the ability to back test hundreds of different indicators and tactics.

The tests were exhausting and involved 30 years of stock market prices. The results were based on pure math so there was no bias or human intervention involved in manipulating the test results.

The Results Are In

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The test results surprised us more than you could ever imagine. Things we thought worked did not work and things that did not work worked better than we imagined.

While I can’t divulge everything that we discovered, I can give you a few bits that will improve the size of your winners and will increase your percentage of winning trades.

Volume And Price

One of the biggest and most interesting discoveries was about the relationship of volume and price. We wanted to see what type of impact volume had on price.

The results proved that volume increase without any type of news or fundamental reports stimulating the stock or the stock sector resulted in 78% of the stocks experiencing a large price changes within 2 trading days of the volume spike.

You may think to yourself that’s not that surprising because when stocks have sharp volume increase, prices usually move one way or another.

This is not the most exciting part of the test results. The best part is out of that number 8 out of 10 stocks remained at the new price level while only 2 stocks went back to the previous price level after 5 trading days.

This means that when volume drastically increases and stocks begin moving without any outside news that would explain the move, they end up either continuing moving or stay at that new price level for about 1 week.

When testing sharp volume increase accompanied by fundamental news directly impacting the stock or the stock sector the stock experienced a dramatic price change about 85% of the time.

But only 3 out of 10 stocks remained at the new price level while 7 stocks went back to their previous price level.

This communicated to us that when prices move either up or down when earnings or other information related to that stock or stock sector is released, the stock has already moved and will reverse direction very quickly to go back to the previous price levels.

How To Use This Data

From this test we learned that entering stocks because news is driving up prices is not a smart idea because by the time the news comes out the great majority of the stocks already moved either up or down and will be moving back to the previous price level in less than 5 trading days.

The more exciting part of the test was learning that sharp volume increase without any type of news and reports related to that stock or stock sector was a great time to enter stocks in the direction of the move because the odds are 20% or less that the stock will move against you substantially within the next 5 trading days.

How Much Volume Is Enough?

The test that was used in our study required at least 75% increase in volume over the average volume of the last 5 trading days. So if your stocks average daily volume is about 1 million shares, you would look for volume over 1.75 million shares. The entry would occur at the end of the day on a MOC (Market On Close Order) and the position was held for 5 days. The exit would occur at the end of the trading session on day five.

How Can This Information Help You

We learned from this test that when Volume is used the right way it can be one of the best stock market analysis tools. When volume is rising sharply and stocks begin moving the first thing you want to see is if there’s any news that could be causing the sharp volume increase.

If there is no fundamental news causing the sharp rise in volume the odds are in your favor that any significant change in the price of the stock is meaningful and real.

If on the other hand you notice a sharp increase in volume and there is a fundamental reason behind it the odds are very strong that the move is temporary or may be already coming to an end and will be most likely reversing within the next trading week.