Volume in trading is an indicator of how much a particular financial asset has been traded within a given time. While engaging in stock trading, investors can use the total number of shares traded to get an indication of their total volume. For futures and options, volume traded is determined by looking at the number of contracts that have changed hands across traders.
Stock market traders and investors look at volume patterns across time periods to get a sense of the conviction and strength around declines and rises in specific stocks or entire markets. Options traders especially benefit from volume trading, since a stock’s trading volume indicates the option’s current interest levels. The volume of a stock is considered very important in technical analysis.
All major stock exchanges keep a track of the volume of all stocks listed on the market. Thus, the volume-related data of a specific stock listed on the market is easily accessible in the market by any investor or trader.
Some of the common ways to find the trading volume are:
Volume in trading is used as a metric for better trades. By following certain guidelines one can determine the strength or weakness of a certain shift observed in the market. The general idea is to avoid participating in market shifts that reflect weakness. Instead, it is advisable to join stronger shifts. The following pointers can help investors reach their goals when using volume trading. It is important to note, however, that these do not apply to every situation and only act as a general set of guidelines.
A rising volume often indicates the start of a rising market, in which it is recommended that buyers should continue to increase their stake and push the prices further up in the market. A scenario in which there is an increase in price but a decrease in volume suggests that there is a lack of interest. This is an indication of a possible reversal. Volume alone may not necessarily be a strong indicator. A price decrease in a large volume trade is considered a stronger indicator.
A price against volume analysis can indicate bullish or bearish signs. For instance, if prices of a stock are falling despite high volumes, it indicates the start of a bearish sentiment. Similarly, if prices are rising with high volumes, it reflects bullish sentiments could be taking over. Although volume and prices are related, it may not mean that each of their movements is in sync with the other.
Momentum is the rate at which stock prices change over time. It helps in identifying a trend. Rising prices are indicators of a bullish momentum, whereas falling prices reflect bearish momentum. To spot momentum, one can conduct a price to volume analysis.
Another option is by using the Moving Average Convergence Divergence (MACD). Traders mostly try to identify bullish or bearish indicators to plan their exit or entry.
Here are the main volume indicators that often form part of technical analysis in stock trading:
OBV is a basic volume indicator. It considers volume changes for predicting stock prices. The assumption under this method is that volume and price are interlinked. The direction in which the On Balance Volume line moves tells traders about the momentum. Thus, if the OBV line is trending upwards, one can expect a bullish phase.
This method was invented by a popular American trader. It is used to measure the dominance of buying or selling pressures in the market. As per CMF indicator, if a stock’s closing price nears its high, it means accumulation or buying pressure. When the closing price nears the stock’s low price, it reflects selling pressure.
Considered being more complex than the OBV indicator, Klinger oscillator shows a comparison between volume and price. It converts the result of the comparison into an oscillator to predict price reversals. Investors can identify long-term money flow trends for select stocks using this indicator.
Here are some of the key benefits of using volume in trading for investment decisions:
Investors and traders who use volume indicators in trading should bear in mind that considering the latest share volume is crucial rather than focusing on the historical volumes. If used appropriately, volume trading can help in identifying market trends, spotting reversals, getting a precursor of bullish trends, buybacks and much more.
A trading volume chart, as the name suggests, shows the stock trading volumes. It is presented in a bar chart format with volume bars of three different colours. These bars represent the rise or fall in volumes, while the colours are indicators of whether the stock price closed higher, lower, or at the same price as the previous close.
Low volume is an indication of bearish trading. If the price of a security drops but on low volume, there could be other factors at play apart from a bearish signal.
If a stock has a very high volume, it is an indication of some action within the company that investors may not be aware of but should know about. It indicates that some good or bad news was recently released, but not in all cases.
The impact of trading volume is often neutral when it comes to stock prices. Trading volume may not directly affect stock prices, but it does have a significant impact on the way that shares are traded.
The four commonly used indicators in technical analysis of stock trading include trend, momentum, volatility, and volume indicators.
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