Turn Down the Volume

Volume data works extremely well using on-balance volume, or OBV, when signals are unambiguous and price sits at a key level. But avoid the indicator entirely when you're lacking one or both of these required conditions. The best trade comes with a strong OBV breakout while price is still stuck at resistance. This predicts it will rally in an attempt to catch the rising OBV.

Price and volume are connected by a hidden spring that allows one side to stretch away from the other until a friction point is reached and the other side plays catch-up. The problem is, this relationship has become less logical and more complicated in recent years. For this reason, most traders should focus their undivided attention on price, and avoid the confusion that volume brings to the analysis.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At time of publication, Farley had no positions in equities mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [e-mail]. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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