Technical analysts use past trading activity to make predictions about a stock’s future price movements. Volume is one of the metrics used in the technical analysis of stocks. Seasoned traders understand how to use volume in intraday trading.
Read on to find out more on how to use volume in trading.
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 Reliance Industries was 81 lakh shares. The average volume indicator helps in identifying the average volumes in a stock over a specific period. As of May 2021, the one-month trading volume of Reliance’s stock was 78 lakh shares.
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.
A price vs. volume analysis can help in understanding bullish and bearing signs. For example, if prices decline at high volume, it indicates bearish sentiment and is likely to become stronger.
Similarly, if prices increases at high volumes, then it shows bullish sentiments are taking over. While they are related, it does not mean that their movements are always dictated by the other.
Momentum shows 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 shows the bullish trend is losing momentum and indicates a likely reversal of a trend. The Moving Average Convergence Divergence (MACD) is a useful indicator of momentum. It helps traders identify when the bullish or bearish indicator is high to help them plan their exit or entry accordingly.
There are three commonly used volume indicators, as shown below:
OBV is a simple indicator that uses changes in volumes to help predict stock prices. As per OBV, there is a correlation between volume and price. The overall direction of the On Balance Volume line helps traders understand the momentum. For example, if the OBV line is rising, it indicates a bullish trend.
Marc Chaikin, a famous American trader, had invented the Chaikin Money Flow (CMF). CMF is useful in measuring whether buying or selling pressure is dominating the market. According to Chaikin, if the closing price of a stock is close to its high, it indicates accumulation or buying pressure. If the closing price is closer to its low price, it shows selling pressure.
Klinger volume oscillator compares volumes with price, converts the result of the comparison into an oscillator and helps in predicting price reversals. The oscillator identifies the long-term money flow trends for specific securities. The Klinger Oscillator is more complex than the OBV indicator.
Technical analysts and day traders learn how to use volume in day trading for their da to day activities.
Like all technical analysis tools, volume indicators can also be used in combination with fundamental analysis tools and other technical indicators. Volume indicators will give you some trends, but they will all be based on past data. Past performance cannot always be relied upon to predict future prices.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.
Net volume is calculated by subtracting a stock’s uptick in volume (the number of shares traded when the price is increasing) from its downtick in volume (the number of shares traded when the price is decreasing). The net volume is calculated over a specified period. If the net volume is positive, it indicates a bullish trend and vice versa.
A trading volume chart depicts the trading volumes of stock. It is a bar chart with volume bars of three colours. The volume bars show the rise/drop in volumes, and the colours indicate whether the stock closed higher or lower than or at the same price as the previous day.
The average volume of stock varies by individual stocks. It would help if you looked at a stock’s average volume over different periods, such as three months, six months, etc. This analysis will help you understand what a good average volume for that particular stock is.