So far, you have got the drift of technical analysis, where the general idea was to carry out an inspection of price movements of the stocks in the market. Today we are going to shed light on the volume, acting as the principal element in technical analysis.
What is a Volume?
Volume is a significant parameter in technical trading. Price and volume are considered as the king of chart analysis as all indicators get constructed by combining them. Therefore, price and volume are the two ingredients that prepare any indicator for market analysis.
Volume is the number of shares traded on a particular day, providing further evidence of institutional buying or selling. It measures the number of shares that changed hands over a period of time. For instance: – if the stocks volume for the day was 1,00,000 shares, it signifies that 1,00,000 shares were bought and sold for that day.
By viewing the charts, the traders can trace the movement in the price of the stocks. The movement in the stock price should get supported by volume. Otherwise, it will have no relevance to the traders. The traders need to look at the average volume of stock for 10 or 30 days to get a better glimpse of the trend. Also, to get the bigger picture of the trend in the stock market, volume must be combined with price, resistance and support level.
Let’s look at the trend by the volume with precision.
Interpretation of Volume
The combination of price and volume represents a trend about the market. The trend pattern depicted by the combination of both is not a rule of thumb; still, it gives a flash of the most probable direction about where the wind of trend is blowing in order to take a trading decision.
|When the average volume is increasing||Price is rising||The combination signals a bullish trend.|
|When the average volume is decreasing||Price is also decreasing||The conjunction depicts a bullish trend.|
|When the average volume is increasing||Price is falling||The combination signals a bearish trend|
|When the average volume is decreasing||Price is rising||The combination presents a bearish trend|
Rising price in combination with increasing volume represents an uptrend indicating bullishness in the market signalling strong interest of the buyers in trade. Falling price along with decreasing volume depicts a bullish trend where selling in the part of unsubstantial investors remains high.
When prices are going up, and the average volume is moving down, it presents a sign that the stock is at the end of its period of continuous rise in prices, and can probably stay at a plateau or decline. Apparently, the trend will get at its peak and then will head towards an end.
When volume decreases, it shows a sign of a trend change.
High average volume signals, the trend will accelerate in a particular direction and will be intensified.
When prices are falling, and the average volume is increasing. It is a sign of a trend extension that has just started and will get intensified. If the price is moving up or down, and the volume is going downward, it shows the trend is progressing towards a change in either upward or downward direction. In-case the support of volume is not in the trend that course will not last long; it will end in the near terms.
Why Volume is an Important Aspect in Technical Analysis?
Volume in trading gives a clue of price reversals and breakouts. A high volume depicts a price reversal i.e. a change in the stock price in the opposite direction, whereas a positive volume signals a breakout where the stock price moves out of the band of resistance and support level.
The attributes of technical analysis are not of much relevance unless combined with volume. For example: – the support and resistance level gains significance when backed by volume trends.
Also, the Investors should combine price trends with volume, as a stock might appear to depict uptrend, but it gets confirmed by the average volume patterns. Many false trends can be identified and dodged by the traders by understanding volume. Moreover, it brings new insights to the traders.
Volume indicates liquidity. The stocks with heavy volume are considered highly liquid. When volume is high, several traders are taking buying and selling in the market. Technical analysis works best on liquid stocks.
Through volume, the traders can identify the bullish or bearish signals. When price and volume move in the same direction, a bullish trend gets confirmed. On the other hand, when prices and volume move in the opposite direction, the bearish trend gets mirrored in the market.
Key Volume Indicators
Based on the market approach followed by the trader, there are various volume indicators of which few of them are: – On Balance Volume, Chaiken Money, Klinger Oscillator, Positive Volume Index and Negative Volume Index. These Indicators provide support in the trading decision process. Hence, the volume is an influential tool of technical analysis where the persuasion of the buyers and sellers gets displayed.