Role of Volume in Trading
Technical analysis

Role of Volume in Trading

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Volume is the validity of price movement. It is an extremely important parameter which one should not ignore, as it shows the strength of price movement. 

Volume is the total quantity of shares or contracts of a particular asset traded in a particular period of time. The period of time could be any – monthly, daily, hourly, etc. It can be applied to stocks, futures and options contracts, commodities and even on bonds.

Let us take an example of stock ABC, the volume of stock ABC on a particular day is 1 million shares which actually means 1 million shares were sold by sellers and bought by buyers on that particular day

 

What does volume signify?

  1. Volume tells the truth behind the price action whether it is genuine or fake and if it is genuine, what is the strength of its movement.
  2.  Rising volume indicates increasing interest of traders in the market activity whether it is an up move or down move.
  3. Rising or high volume confirms the strength in the ongoing trend, for example, in an uptrend, it shows buyers keenly pushing the price in an upward direction and in a downtrend it shows sellers keenly pushing the price in a downward direction.
  4. Volume is a good indicator of reversal of trend or change in price direction. As, when volume starts decreasing with the rise in price in uptrend or when the volume starts decreasing with a fall in price these both situations indicate the reversal of trend or change in price direction.
  5. Volume validates the breakouts. Heavy volume on breakouts is an indication of valid or true breakout while low or average volume indicates false breakouts or not a significant move. 

 

As told above volume represents the strength of price movement or the trend itself. Let us see how:-

  1. If the volume increases with a rise in price it shows the strength in uptrend. 
  2. If the volume decreases with a rise in price it shows the weakness in the uptrend. 
  3. If the volume increases with a fall in price it shows the strength in the downtrend. 
  4. If the volume decreases with a fall in price it shows the weakness in the downtrend. 

 

Exhaustion moves and volume 

Exhaustion moves are sharp or exceptional price movements combined with extraordinary volume. They generally occur at the end of the ongoing trend. Usually at the bottom of the downtrend sellers exit and at the peak of the uptrend buyers exit, which increases the volatility of the asset and so is the volume.

 

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