"Many of the stocks on my watch list have been experiencing something of a recovery rally since the July lows. Especially the past three days. Yet I am hesitant to get back in because there has not generally been a concurrent increase in volume. If anything, volume has been lower in many cases. So I continue to stand aside.Am I focusing too much emphasis on volume during this historically lower volume month? Letting opportunity pass me by?"Well, of course, my answers are not necessarily your answers. That said, if prices move and you are not aboard, then yes you allow opportunity to pass you by. I think you might have a touch of the perfectionist in your portfolio management techniques. This is a pernicious ill that I discuss frequently, as well as share excellent essays by other market analysts. Note, for example, the essay below in reply to Allan's question.
Back on point. Why can you not allow yourself to stage incrementally into a position? For example, do prices move sans volume (or etc)...? Then take a smaller initial position. This is how pro's do it, and is only one reason for the existence of follow-through days. And never forget volume accords its status at specific inflection points; i.e., crucial moments when the market's gears change direction. This concept might appear visually obvious; it is anything but.
And Allan Harris writes,
"Lots of rules there, David. Is it possible to abide by them all, or even apply them in the heat of battle?"
In a classic book in the field of psychiatry, Neurotic Styles, Dr. David Shapiro described the maladies and qualities of the obsessive-compulsive person. He or she is constantly searching for rules to follow, turning a world that is often full of shades of gray into black and white universal standards. I doubt many of us would want to be around such people. There are some settings where this style of thinking is rewarded, however. For instance, when doing your income taxes, the rules can be quite rigid, and following unfailing, exacting standards can be a virtue. I'm sure that you can think of various occupations where focused rigidity is useful. Some engineers or accountants may realize success by approaching their job with an obsessive-compulsive rigidity.
Is trading one of these fields? It depends on how you look at it. Surely, discipline is essential when trading the markets. After mapping out a specific trading plan, it is useful to follow it to the letter. Traders are infamous for either failing to make a trading plan or abandoning it prematurely. A little bit of obsessive-compulsive thinking would not hurt most traders. For example, it is useful to buy at $100, decide to sell at $105, and exit if it goes down to $95. A true obsessive-compulsive person probably wouldn't make a good trader, however. Such a person would constantly worry about where the price was relative to entry and exit points. Waiting for the eventual outcome would be agony. In addition, the markets don't follow precise rules. Trading is more of an art than a science. We can't always buy at $100, and expect to get filled, and sell at $105, and expect enough buyers to take our position at our asking price. It's more like we sort of buy at around $100 and sell when the price starts going down to around $95 or up to around $105. It's useful to be a little flexible when trading the markets. In addition, obsessive-compulsive people like sure things. They fruitlessly strive for perfection, thinking there is perfect knowledge and that everything operates according to rule-driven logic, but as we know, the markets go where they want and when they want. The markets are not always logical. In addition, trading the markets requires taking risks, and living with constant uncertainty. An obsessive-compulsive person couldn't stand the risk. It would be torture to live under such uncertainty. If you like trading the markets, you probably don't suffer from obsessive-compulsive disorder, or a full-blown case of it at least. But adding a little bit of obsessive-compulsive thinking to your trading cannot hurt when it comes to executing your trading plan. It's useful to think of a trading plan as a set of rules that you absolutely must follow. Pretend that you have no choice but to follow the rules. If you stay a little rigid during this one phase of trading, you will be more likely to minimize losses and increase your ability to make huge profits across a series of trades. There are times when a little obsessive-compulsive discipline can't hurt.
I hope there is some answer herein for everyone. Please ask again, if not.
-- David M Gordon / The Deipnosophist