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Part 2: What do these things mean?

The price of a stock I should hope to be self-explanatory. It’s how much the stock sold for at its last trade. But why volume and volatility matter are far less obvious.

I’ll deal with volume first:

Think of volume (amount) of stock bought & sold as a measure of the market’s interest in a stock. Not interest like the rate you would get on a loan but rather, how interested the market is in buying and/or selling it.

Now remember, interest is a neutral term. The market could be interested in a stock for a bad reason just as much as it might be interested in it for a good reason. I might be very interested in SELLING a stock due to some bad news for example, same as I might be very interested in buying it because of some good news. When volume increases it almost always comes with a corresponding big movement (so increase the the volatility) in the stock and this will tell you why the market’s interest in it just shot up – it will have either gotten very interested in selling it, or very interested in buying it.

There’s a lot of reasons why the market will/won’t be interested in a stock, arguably an infinite number as every single buyer/seller will have their own personal reasons for wanting to buy or sell, and this is what you as the budding new chart analyst in this thread need to think about when you look at changes in a stock’s volume bought/sold:

Why is the market interested in this stock? Was there good news? Was there bad? Are they anticipating good news? Are they anticipating bad? Did something spook them? Are they running scared from something else risky and just looking for a safe place to park their cash for the time being? WHY are people buying/selling this?

Volatility, however, is a whole different kettle of fish. Volatility is an indication of the market’s confidence of its valuation.

Think about this logically – if a stock only ever traded in a very narrow price window (or, band), say only ever between $999 & $1001, then the market is, as a whole, very confident in its valuation. To put it another way, there’s a strong market consensus of the value of the stock being right around the $1000 mark.

But imagine if the stock regularly traded between $500 and $1500. That’s a tripling one way or a 67% drop depending on how you look at it. That’s a WILD fluctuation in price which tells us that the market really has no idea how much this thing is actually worth aside from being somewhere between $500 and $1500, which is an enormous range to be bouncing around in (very deliberate use of term - more on range later).

This volatility is so important that an entire index called the “vix” (which is literally Volatility IndeX) was created to use as a trading tool and you can see on this graph just how closely market movements follow it:

[ATTACH=full]121891[/ATTACH]

The vix is also referred to as a “fear index” which is quite an accurate descriptor in my opinion – you’ll see the vix spike when the markets plummet and then drop when they return to more normal movements.

There is also a vix for every individual stock and it is called “implied volatility” but that is beyond the scope of this beginners thread – I or someone else will cover it in the intermediate part of this guide.

All you as a beginner need to know is that the longer the candles are, the more volatile the stock is.