Trading Mistakes to Avoid – Ignoring Volume

We already touched on this point in the previous chapter about following the smart money, but it’s arguably the most important factor in trading in harmony with the smart money, so it’s worth while reinforcing and expanding upon.

Price moves on heavy volume indicate smart money activity. If you are trying to follow the smart money, as you should be, then volume is your primary guide and informant. Retail traders simply don’t generate the type of huge volume bars you often see behind big price moves. Only institutions and hedge funds have the fire power to push prices, and when they do, it’s clearly indicated in the volume bars you see on your stock charts. I’m not referring to cheap, illiquid, low flow stocks, or occasional meme stock outliers like Gamestop, where retail traders could have a short term effect on pricing. I am referring to highly liquid stocks that trade millions of shares daily. These stocks can only be moved by heavy, institutional volume.

Watching the volume will help you identify stocks to buy and sell, and keep you from getting faked out of your positions on temporary pops or drops in price.

Take Apple (AAPL), for example, one of the most widely traded and liquid stocks on the market. Let’s say you see it break out of a consolidation zone above a resistance level, but the breakout happens on below average volume. That’s a red flag. Without significant institutional participation the move is likely to fail, and you could find yourself chasing a false breakout. On the other hand, if AAPL breaks out on a volume surge two or three times the daily average, that’s a strong indicator that the smart money is behind the move. Institutions don’t just dabble; when they commit, it’s clear in the volume. This is when you want to go along with the momentum and ride the wave.

Let’s look at Tesla (TSLA), a notoriously volatile stock. Imagine TSLA is experiencing a significant pullback after a sharp run-up. You see price testing a key support level, such as the 200-day moving average, but the volume during the pullback is light. This could indicate a lack of conviction from sellers, signaling that the pullback might just be a brief pause before a  continuation higher. However, if the price drop to the 200 is on high volume and breaks through, it’s more likely that the smart money is unloading their positions, and you’d want to avoid—or short—the stock.

Volume can also help you avoid getting faked out during sudden spikes or drops. Consider Nvidia (NVDA), a favorite among traders. If the stock suddenly spikes 3% on news but does so with minimal volume, it’s likely a short-term retail-driven reaction. Jumping in could leave you holding the bag as the price retraces just as quickly. Conversely, if the spike happens on a volume surge well above the average, it’s more likely that institutions are driving the move, and there could be follow-through in the days ahead.

It’s not just about spotting entries either. Watching volume can help confirm when it’s time to exit. Imagine you’re holding Meta (META), and it’s been climbing steadily for weeks. One day, it gaps higher on unusually light volume in the premarket, and then during the regular trading session, it starts selling off with significantly higher volume than usual. That’s often a signal that institutional sellers are stepping in, and the stock could be topping out. Exiting at that point can help you lock in profits before a potential downturn.

Volume can also help you avoid getting faked out during sudden spikes or drops. Say NVDA suddenly spikes 3% on news, but does so with minimal volume – it’s likely a short-term retail-driven reaction. Jumping in could leave you holding the bag as the price retraces just as quickly. Conversely, if the spike happens on a volume surge well above the average, it’s more likely that institutions are driving the move, and there could be follow-through in the days ahead.

A pop on low volume is a sign to wait and see, not to jump in. The pop could be retail traders driven by FOMO wanting to get in on action. The smart money could also be pushing the price higher to trigger retail FOMO and create the liquidity they need to start exiting their positions and collecting their profits.

Bottom Line

The key takeaway is that volume gives context to price. Price alone doesn’t tell the whole story. High-volume moves are the footprints of the smart money, and by paying close attention to those footprints, you can make better trading decisions. Ignoring volume, on the other hand, is like trying to drive wearing a blindfold. You’re bound to crash, sooner or later.