Volume, as understood in the general sense, is counted as the total number. Here in Share Market terminology, it is measured as the number of shares that are actually traded (bought and sold) during the trading period i.e., within a specified set period of time. Volume is the measure of the total turnover of shares.
Each ticket represents a trade and counted towards the total trading volume. While the same shares may be traded back and forth multiple times, the volume is counted on each transaction. Therefore if 200 shares of ABC were bought, then sold, then re-bought and then re-sold again resulting in four tickets, then the volume would register as 800 shares, even though the same 200 shares may have been in play multiple times.
Key Components of Volume Trading
The crucial elements of volume trading encompass various aspects like:
- Volume Bars: These bars on stock charts outline the quantity of shares exchanged within a designated time frame. Notably, a surge in volume often precedes substantial price shifts, signifying heightened market interest and engagement.
- Volume Patterns: Traders actively seek distinct volume patterns to discern potential trends. For instance, a breakout accompanied by substantial volume is deemed more dependable, indicating widespread consensus among market participants.
- Volume Indicators: Popular technical metrics like OBV and Chaikin Money Flow are extensively used to evaluate buying and selling pressure through a thorough examination of volume fluctuations. These indicators assist traders in confirming trends and anticipating potential reversals. By understanding these fundamental elements, traders can augment their capacity to interpret market dynamics and make more insightful decisions.
Effect of Volume on Stocks
The impact of volume on stocks is pivotal in gauging market dynamics. A surge in trading volume coupled with a rise in stock prices usually signifies robust buying pressure. Investors, responding to increased demand, drive the stock to higher values. Conversely, a decline in the price of a heavily traded stock implies significant selling pressure.
The low trading volume introduces varied interpretations. A rising stock with a low volume may indicate a scarcity of sellers, whereas a falling stock with a low volume may indicate a lack of bids. Understanding the relationship between volume and stock movements allows investors to detect market sentiments and make better-educated decisions in response to purchasing or selling forces.
How To Find Volume on a Chart
The magnitude of trading volumes are visually displayed throughout the trading day usually at the bottom of the price chart. Volume is typically displayed as a vertical bar representing the total volume for the specific incremental charting time period. For example, a 5-minute price chart would display volume bars displaying the total trading volume for each 5-minute interval. Volume bars are usually colored green or red. Green represents net buying volume while red represents net selling volume. Some traders prefer to measure the volume with a moving average to spot when volume is relatively heavy or thin.
Why is Volume important?
Volume is the prominent intent of any stock. It represents the interest in the trading activity of said shares. Heavier volume indicates heavier interest and vice versa or lighter volume.
A rise in volume tends to kick off significant price moves in many cases, however it is not a requirement. Despite conventional thinking, breakouts or breakdowns don’t always require heavy volume especially in this age of algorithms that know precisely what price levels will efficiently trigger significant movement. Many traders have gone bust shorting ‘light’ volume breakouts that continue to grind higher despite the lack of sustained heavy volume.
The cliché “Never short a dull market.” plays right into this. Often times, the heaviest volume bar forms at the peak of the move. It indicates the last of the chasers. This is why heavy volume hammer and shooting star candlesticks can form highly effective reversal signals. Volume analysis should be used in the context of the trading market environment with other supporting technical indicators.
What is Relative Volume and How Does It Matter?
The relative volume compares current volume to the “normal” volume and displays it as a multiple. The normal volume is the average volume for that given period of time for a past-specified number of days. When the relative volume is 2.5, it indicates that the shares are trading 2.5 times the normal volume. This reveals an increase in trading activity that may lead to a significant price move. Relative volume is available on most trading/chart platforms. A surge in volume can indicate money flow into or out of a stock, which indicates action.
How Does Volume Work?
Volume records the number of transactions taking place during a period of time. It is a direct measure of liquidity in a market. The major exchanges report volume figures on a daily basis, both for individual securities and for the total amount of trades executed on the exchange. Volume also reflects pricing momentum. When market activity — i.e., volume — is low, investors anticipate slower moving (or declining) prices. When market activity goes up, pricing typically moves in the same direction.
In addition, technical analysts use a stock’s volume in order to determine the best entry and exit points for a trade.
