Unlocking the power of volume analysis in stock market. Discover volume basics, right way to look into volume, why volume is so important in relation to price movements. How to use volume in a logical way to make profitable trading - a step-by-step guide.
Table of Contents
Introduction
Volume Basics - What is volume?
What is volume analysis?
The right approach to look into volume
Volume history
Volume information in isolation
Relationship between Price and Volume
Conclusion
Introduction
The stock market is a complex and dynamic financial ecosystem that plays a vital role in the global economy. In technical analysis, we use price and volume to predict the market movements. One of the key metrics used to assess the market's activity and liquidity is volume. Understanding the volume of the stock market is crucial for investors, traders and analysts as it provides valuable insights into market sentiments and helps to take better trading and investment decisions.
Volume Basics - What is volume?
In
layman's language, a volume is the number of buys and sells of a stock
or any other instrument over a given period. Volume in the stock market
refers to total number of shares or contracts traded during a specified
time, typically within a trading day. It is generally measured as the
number of shares traded, but it can also refer to the number of
contracts in the case of futures and options markets. Volume is usually
presented as a bar chart at the bottom of price charts indicating the
intensity and scale of trading activities. It actually reflects the
interactions between buyers and sellers.
What is volume analysis?
Volume
analysis is the practice of integrating your knowledge of volume into
your stock trading decisions. It is your skills to evaluate the changes
and trends in volume for a given security in order to determine weather
you want to make a buy or a sell decision. If you want to be a
successful trader you need to take volume into account while doing
technical analysis. Conducting high level volume analysis is not too
difficult, but there are certain principles you need to keep in mind
when conducting volume analysis.
The right approach to look into volume:
Many
people don't have the right approach to volume count. Volume is the
number of shares bought and sold over a given period of time.
Suppose,you buy 100 shares of TCS @Rs.2300 and I sell 100 shares of TCS @
Rs. 2300. So , in this trade we see a price and quantity match. You and
I combindly created a volume of 100 shares not 200 shares. Many people
count as 100+100=200 which is not the right approach to look into
volume.
Volume history:
Volume
should be evaluated relative to the recent history of the stock. In
other words, comparing the volume of TCS stock now to the volume of TCS
stock when it was launched in the market won't make sense because so
many details have changed with the passing of time.
Volume information in isolation:
Volume
information in isolation is useless. If on any day we see that the
volume of Reliance Industries is 600000 . What does it mean? We can't
understand anything from the volume above. It has no merit so means
nothing to the people. But if you compare the volume information with
the price movements then it would mean a lot.
Relationship between Price and Volume:
Volume
helps to confirm the validity of price movements. In the table below
you will find the actual relation between volume trend with price.
In
the above table the first line says that when the price increases with
the increase of volume then the view is bullish. What does the
sentence 'with the increase in volume' mean? What is the reference point?
Be it the previous day's volume? or previous week's total volume? or
previous month's combined volume? As a general practice, trader usually
compare today's volume with the last 10 days average volume. The rules
are:
High volume means today's volume greater than last 10 days average volume.
Average volume means today's volume is equal to last 10 days average volume.
Low volume means today's volume less than last 10 days average volume.
If
both the price and volume increase, it only means that the big players
are showing their interests in the stock. When institutional investors
buy or sell shares they transact with heavy volume. When they buy any
stock in big quantity, the stock will reflect in volume. Remember, "Price
can be hidden, volume can't be hidden". Institutional money means smart
money. We all know that only smart money can move the market. So,
following the footprints of the big players is a good idea to be in the
right side of the market. The 1st line of the table indicates the same
idea which tells when price increases with high volume the view turns
bullish and one can initiate a buy position in the stock.See the chart below:
Now
come to the 2nd line of the table when price increases but volume
decreases. What does it mean? It means retailers or weak hands are
buying, not the big players. If smart money buy then the stock will
reflect in volume which should increase. So, you need to be cautious as
it may be a bull trap.See the chart below:
Next,
come to the 3rd explanation which tells that decrease in the price
with an increase in volume indicates a bearish view. Because, price
decreases means selling is happening in the stock, volume increases
means big players are involved in selling. So if we follow the smart
money we should look for an opportunity to sell.
In
other words,when you decide to sell any stock make sure that the volume
is high. It means that you are in the right side of the market with the
big players who are selling. See the chart below:
Let's
come to the 4th line of the table which tells that a decline in price
with low volume indicates weak hands are selling not the big players. If
the smart money were selling then the volume would be high. That means
the retailers are selling the stock, no big players involved. So you should
be cautious as it may be a bear trap. Market may reverse from here.See the chart below:
Conclusion: Volume analysis is a very important part to analyze a stock
when you predict whether it will rise or fall. Some investors even go
so far to tell that volume is actually more important than the price of a
stock in determining whether it will go up or down. So, take the
information that you have learned in this article and get to implement
it into practice. No one is born a perfect trader. On the other hand,
with consistent practice and recapitulation you will have the confidence
to make smarter decisions that you believe will be beneficial to your
trading skill. We will bring more articles on volume analysis in our future posts. Stay with us.
Disclaimer: The information provided on MoneyWiseMind is for
educational and informational purposes only. It is not intended to be
financial advice, and you should not rely on it as such. Before making
any financial decisions, you should consult a licensed financial
advisor.
