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Watching the Dow’s Volume

Indices, like the Dow Jones Industrial Average, do not have a trading volume, per se, mainly because they are measures of a group of stocks, and not an actual asset themselves. Derivatives of indices can be assets, and these can have volume, such as you see with ETFs, mutual funds, and binary options that rely on the price of an index for their worth, but the index itself cannot have a volume. This can make it hard for index traders to gauge momentum when it comes to an asset’s changing value, but luckily, there are ways to get an accurate idea of where things are headed without this concrete number.

We bring this up because right now, there is a ton of focus on the Dow. Almost every trading day in 2016, the Dow has started out with plummeting prices, only to try and drag itself out of the hole it has fallen in later in the day. Looking at volume can be a good way to figure out just how hard the Dow will fall, and how much effort it will take to recover, but because there is no easy way to do this, many traders find themselves at a loss, simply because they don’t have the tools to give themselves an accurate picture of what’s going on.

Rather than look for a single volume number, you need to look at the trading volume of each individual company that comprises the index. With the Dow, this is actually quite simple, but only because there are only 30 companies in this index. This is the smallest major index in the U.S., which makes it easier than any other index would have it. The S&P, for example, is comprised of 500 companies, making your job a lot harder here.

It’s definitely worth noting the trading volume that is going on behind the scenes of the 30 DJIA companies right now. As this index keeps dropping in price, watching the strength of the decline can tell us how serious it is, and how hard it will be to recover from whatever low prices are established.

There are certain times of the year when volume is higher than others, and these usually peak during earnings season—or four times a year. If you look right now, earnings season is quickly approach for end of 2015 reporting, and that means that volume is higher than normal. During peak times, the Dow’s “volume” can go up over 200 million and approach 300, and that is exactly what we are seeing right now. The downward force being attributed to oil and China, then, is being made much worse because of the time of year that it is. For downward traders, there is far more certainty in their trades than normal because of the combination of these factors. It gives a big advantage to short term traders, especially.

Here’s the thing that traders of all sorts need to remember about volume: it does not equal price. But when there is a definite trend in the mix, strong volume can make prices move more quickly. This is a great tool for binary options traders specifically because they can secure large profits in short timeframes, and hopping on a trend with large volume can increase the surety of the outcome of the trade. Because it’s approach earnings releases for major Dow companies, and because the pressure is already down, a perfect situation for dropping prices has been created. This could be reversed if earnings were up at the end of 2015, though, so it is definitely worth paying very close attention to for the next couple weeks.

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