Volume Analysis Meaning
The analysis of the contracts of a security or the number of shares that have been traded in a certain time period is known as volume analysis. Volume technical analysis is just one of the many ways in which technical analysts predict market movements to determine when their trades will be profitable. Stock volume analysis can inform various trading decisions. By looking at the trends in conjunction with price movements, investors can aid in determining the changes in a security’s pricing.
Any kind of analyst can look at the volume at which a security is trading so volume analysis is not restricted to professionals by any means. Generally speaking, when people refer to volume analysis, they are talking about the number of shares traded per day although it can also be used to ascertain the number of futures and options contracts a security has collected. By having an understanding of the trading volume in a certain market versus the trade’s entire trading volume and contrasting the two, a trader can easily gauge its demand. Furthermore, demand can forecast future market trends.
What is Volume In The Stock Market?
volume stands for the total quantity of shares traded for any security. For example, at the time of writing, the daily trading volume of Tesla motors was 59 Lakh shares. The Average Volume indicator helped in Indentifying the Average Volumes in a stock over a specific period. As of july 2022, The one month trading volume of Tesla motors' stock was 71 lakh shares.
What do high and low Volumes Indicate?
High Volumes in a stock indicate higher investor interest in buying or selling a stock. Low Volumes suggests lack of liquidity and a few traders/investors take interest in the stock.
How To use Volumes to Spot Momentum?
Momentum shoes the rate at which prices of a stock are changing over time and helps identify a trend. Rising prices indicate a bullish momentum, and falling prices indicate bearish momentum. A price vs volume analysis can also help in spotting momentum.
If the price is increasing at low volumes, it shoes the bullish trend is losing momentum and indicates a likely reversal of trend. The Moving Average Convergence Divergence(MACD) is a useful indicator of Momentum. It helps traders identify when the bullish of bearish indicator is high to help them plan their exit or entry accordingly.
By going through the list of indicators and selecting volume. In the chart you will see volume depicted by the red and green bars at the bottom, The volume moving average is depicted by the black line dragging across. Now logic says that the biggest green bar should be good volume, but reality doesn’t work like this. A good high volume should break the black line. Any that crosses the black line is good, as it means volume breakout.
Let’s look at these four cases...
- 1.When volume is increasing and price is also increasing.
The market is bullish, and becoming more bullish, the price is rising and buyers are ready to buy at higher prices. The bars indicate that the overall participation in the stock is high, both buyers and sellers are increasing. Volume alone means nothing, along with increase in price it depicts a strong bullish market.
- 2. Price is increasing, but volume is falling.
This means the participants are very low, but the price is still opening. Hence, the public is not interested in the high market, because they are fearful of a fall. This is a weak bullish market. It is an early sign of reversal. So, you have to be cautious.
- 3. Price is falling, but volume is increasing.
This means participation in the stock is great, the volume is breaking through the black line. More people are buying and selling this stock, even though the price is falling. This means the public is very interested. This is a strong bearish market. Short selling is happening a lot. This means the chances of it falling further are higher.
- 4. Price and volume, both are falling.
Here you will notice that the volume bars are quite small, and quite a few of them end below the black line. This means the participation in the market is very low, among both sellers or buyers. The price of the stock is also falling. This is a weak bearish market. This is an early sign that may change the market into bullish reversal, but we cannot predict with surety. So you must be cautious and wait for the uptrend.
Should one look at volume indicators on a daily, weekly, monthly basis or how often? Well, if you are going to trade on a daily basis, look at it every 5–10 minutes. If weekly, then look at it hourly. If you are going to trade in a month, look daily. The time frame depends on how long you want to participate in the trend. Volume is an incomplete indicator if you do not look at the correlation with price.
7 Volume Indicators
Volume indicators are mathematical formulas that are visually represented in the most commonly used charting platforms. Each indicator uses a slightly different formula, and traders should find the indicator that works best for their particular market approach.
Indicators are not required, but they can aid in the trading decision process. There are many volume indicators to choose from, and the following provides a sampling of how several of them can be used.
- 1.Volume RSI
The Volume RSI (Relative Strength Index) is a volume indicator which is similar to the Relative Strength Index except that up-volume and down-volume are used in the formula of RSI instead of changes in price.
Volume RSI oscillates around 50% center-line in the range from 0 to 100%.
One of the ways of using this volume indicator would be to trade on the signals generated on the crossovers of the indicator and 50% center-line around which it oscillates.
- When the Volume RSI reading is above 50% then it is considered bullish indicating bullish volume dominates over bearish volume.
- When the Volume RSI reading is below 50% then it is considered as bearish indicating bearish volume dominates overbullish volume.
Thus, one should buy when indicators move above 50% line from below and sell when indicator drops below 50% line from above
- 2. On-Balance Volume (OBV)
On-balance volume (OBV) is a simple but effective indicator. Volume is added (starting with an arbitrary number) when the market finishes higher or subtracted when the market finishes lower. This provides a running total and shows which stocks are being accumulated.
It can also show divergences, such as when a price rises but volume is increasing at a slower rate or even beginning to fall.
- 3.Volume Price Trend Indicator
The volume price trend (VPT) indicator is a volume indicator that helps in determining a stock’s price direction and also the strength of price change.
The indicator consists of a cumulative volume line that adds or subtracts a multiple of the percentage change in a share price’s trend and current volume, that is based on the security’s upward or downward movements.
This indicator is similar to the on-balance volume (OBV) indicator i.e. it measures cumulative volume and also provides traders with information about a security’s money flow.
The interpretations of the VPT can be summed up as follows...
- An increase in price and volume confirms the price trend upward.
- A decrease in price and volume confirms the price trend downward.
- An increase in price accompanied by a decreasing or flat volume trend is a negative divergence suggesting that the downward price movement is weak and may reverse.
- A decrease in price accompanied by an increasing or flat volume trend is a positive divergence suggesting that the upward price movement is weak and may reverse.
- 4. Chaikin Money Flow
Rising prices should be accompanied by rising volume, so Chaikin Money Flow focuses on expanding volume when prices finish in the upper or lower portion of their daily range and then provides a value for the corresponding strength.
When closing prices are in the upper portion of the day’s range, and volume is expanding, values will be high. When closing prices are in the lower portion of the range, values will be negative. Chaikin Money Flow can be used as a short-term indicator because it oscillates, but it is more commonly used for seeing divergence.
- 5. Klinger Oscillator
Fluctuation above and below the zero line can be used to aid other trading signals. The Klinger oscillator sums the accumulation (buying) and distribution (selling) volumes for a given time period.
- 6.Accumulation/distribution
The Accumulation Distribution Line is a volume indicator which measures the cumulative flow of money into and out of a stock.
A high positive multiplier with high volume indicates strong buying pressure which pushes the indicator higher. On the other hand, a low negative number with high volume indicates strong selling pressure which pushes the indicator lower.
This indicator tries to detect positive or negative divergences in price and volume data which signals an advanced warning of future price movements.
- 7.Ease of movement
The Ease of Movement indicator another important volume indicator, helps in measuring the ‘ease’ with which a stock price moves between different levels based on volume trends. An easy moving price is one which continues in its trend for a particular period.
This indicator works best in volatile markets where the trends cannot be clearly seen.
This indicator is best when it is used for longer time frames, like a daily chart as it identifies trends based on volume averages.