Dictionary

Volume

What does Volume mean?

In the stock market, volume indicates how much of a particular stock is traded within a specific time frame. Stocks traded more in number because of greater investors interest or significant attention are termed as High-Volume stocks. Comparing the current stock’s volume with the historical volume allows the investor to make investment decisions. Volume assessment also projects the price trend or potential reversal in the market. Therefore, volume is a crucial component for technical traders.

Volume may mean different for different securities. In the forex market or securities traded over the counter (OTC), the number of changes in the prices at a particular time interval is considered its volume.

Volume is a measure of the total turnover of shares. Each trade is presented as a ticket and is counted separately even if the same bunch of shares have changed hands multiple times. For example: if 100 shares of ABC were bought, then sold and then re-bought and re-sold, it would result in 4 tickets. Volume, in this case, will be 400 shares.

Summary
  • Volume is often taken as a sign of liquidity.
  • Volumes are used in technical analysis. it is utilized to confirm patterns and price trends.
  • High volume indicates positive trends.
  • Volume should be assessed along with the price movement.
  • The choice of volume indicator is dependent upon the investor and their requirements.

Frequently Asked Questions (FAQ’s)

What is the importance of volume in trading?

A volume is a technical tool that confirms the chart pattern or price trends. The volume can impact the price movement in the stock market. By analysing the historical volume movement, the investor can predict the stage when the price might lose its momentum.

Volume numbers indicate the interest of the traders in a particular share. The higher volume shows a high level of interest and vice versa.

Volume has a significant positive relation with liquidity. High volume stocks have higher liquidity, and the transactions can be executed smoothly. It allows investors to cash in and out their position in the market quickly. In cases where the investors are not able to predict the direction of the stock market, futures trading volume tends to increase, leading to active interest by investors in the options and futures of some specific securities.

Generally, high trading volume is observed near the opening and closing time of the stock market, whereas during lunchtime, the trading volume is generally low.

Volume Chart’s location

The visual presentation of the volume traded throughout the day is present in the price chart of all trading platforms. The volume traded is presented in the form of bars. For example, an hour price chart would show the volume traded in the hourly interval. Generally, the volume bars are either red or green in colour. The red colour represents the volume sold, and the green indicates the volume bought in an hour.

Graph: AMEX:APT

In the graph above, the blue line shows the price movement, and the bar graphs at the X-axis shows the volume traded. All the red bar graph shows the shares sold and green shows the volume of shares brought.

How to use volume for technical analysis?

Generally, an investor takes position when the market is weak and aims to gain income when the market shows a strong upward movement. Some investors take a position in the market when the market moves strongly and profit from the same. However, a trader should consider several aspects while investing on the basis of the volume.

  1. Trend Assessment: In the rising market, the volume tends to rise. To keep the price rising, the traders have to increase the number of transactions. If stock prices are increasing, but the volume is decreasing, then a reversal can be predicted. The fundamental utilized is – if the price is highly volatile, it is a positive signal. However, if the price is volatile but the volume decreases, then it is a negative signal.
  2. Exhaustion: If a sharp increase is observed in the stock price along with the volume, then it can be estimated that it is the potential end of the current trend.
  3. Bullish Signs: Volume can be used to predict the bullish market. If the volume increases accompanied by the decreasing price, then the prices will tend to move upward following the initial downward move. If the downward price movement does not cross the previous fall, and the volume trading is lower than before, this will result in bullish price movement.
  4. Price reversal: After high price volatility and trading volume, if the price shows little movement with high volume, then the price reversal (change in the direction of price) should be predicted.
  5. Historical data: The current volume should be compared with the recent historical data. It will provide information regarding the short-term trading opportunities.

What are the different the Volume indicators?

There are different volume indicators based on which the volume is presented graphically. The difference can be seen in the indicators as they employ different mathematical formulas.

On-balance volume: The indicators show the relationship between the price change and volume flow. The price is predicted by analysing the cumulative trading volume in the market. This indicator helps in knowing which stocks are been accumulated.

RSI: The RSI indicator shows the speed of the change in the volume in both increasing and falling price situations. If the indicator crosses the 50% line in the oversold region, then a bullish trend can be observed. Similarly, if a 50% line is crossed in the overbought region, then a bearish trend can be observed.

Chaikin Money flow: It measures the flow of money for a chosen time frame. The value of the indicator will be high when the security's closing price is in the upper portion (above 0) accompanied by the rising volume. If the closing price is in the lower portion (below 0), then the value will be negative. The indicator focuses on the closing price and projecting the market trend. However, it is usually used for locating divergence as it oscillates.

Klinger Oscillator: The indicator is employed to identify long-term money flow trends keeping an eye on short-term fluctuations. The indicators provide information regarding the forces involved in price close. The indicator will rise significantly if the price will be closing at a higher price along with a huge volume. Therefore, estimating a pressure on the buying side. Similarly, the indicator's selling pressure will be predicted by moving downward if the price will be closing low accompanied by the high volume. This indicator gained immense attention as it predicts the price reversal and the trend. 

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