Volume analysis for trading
The volume of a stock or asset class indicates that how many shares are bought and sold over a given period of time. Volume analysis is one of the best and valuable strategy in trading which can help the investors and trader to get more insights about the price movement in and analyze the strength of price movement in market. Volume analysis provides insights to traders and investors about the strength of a trend, allows to determine the support and resistance levels, also helps to determine and expect possible trend reversal to make informed decisions in market. Using volume analysis with other trading strategies and technical indicators helps to analyze with more accuracy to improve the trading outcomes and increase profitability from the markets.
Volume
Volumes of a stock helps the traders and investors to determine how many shares are bought and sold in the market over a given period of time. Volume will be displayed in the chart according to the time frame, which helps to analyze according to the trading style of traders. Intraday traders prefer high volume shares to capitalize the quick movements in market without any liquidity issue.
How to analyze volume
Let’s understand how to analyze volume with a live example of Tata Motors stock chart. The volume bars are displayed on the bottom of the image. From the image we can understand that Tata motors share price has been rising significantly from 475 with huge volume. the share price of Tata motors was moving up with huge volume, it indicates the strength in the uptrend of stock. Short term traders should have entered into a long position combining volume analysis with their trading strategy to earn better trading outcome.
| STOCK PRICE | VOLUME | TREND |
| INCREASES | INCREASE | BULLISH |
| INCREASES | DECREASE | BUYERS ARE WEAK /CHANCE OF FAKE BREAKOUTS |
| DECREASES | INCREASE | BEARISH |
| DECREASES | DECREASE | SELLERS ARE WEAK / CHANCE FOR FAKE BREAKDOWN |
Use of Volume
- Imagine if 10,000 shares changes hands in market intraday it means that the Volume = 10,000
- Number of sellers and buyers do not matter in analyzing the volume of a stock. Trend and volume only matter.
- Volume indicates the interest of investors and traders on the stock. If volume is high that indicates the stock is highly interested.
- Volume provides trades indication to confirm trends and patterns.
- High volume can result in high price action, thereby can cause breakouts and trend reversals. Breakouts with less volume can be a fake out so volume analysis is prominent for breakout traders.
- Volume tells about the trading activity in a stock. High activity is preferred for intraday trading.
- Volume gives insights into how other participants perceive the market when it is combined with the trend of a stock.
- Volume helps us confirm trends and patterns which helps traders to take intelligent positions in market.
- If a breakout is happening without volume, it indicates the market participants not ‘believing’ in that move and there is higher probability that breakout will not sustain.
- High Volume is always preferred while actively trading an instrument.
Why Red & Green Volume Bars
- The colour of candlestick and volume bars are interlinked, If the candlestick is green, then the volume bar will also be green. And the same case for red volume bars
- Colour of volume bar depends on the colour of the corresponding candle stick. A green volume bar indicates that the closing price of the corresponding candlestick is higher than the previous candlestick.
- A red volume bar represents that the closing price of the corresponding candlestick is lower than the previous candlestick.
How to See Volume?
- You can see it on your broker’s terminal and on charts
- Use the volume indicator or volume profile to enable volume bars in chart and can start analysing.
