With understanding stock market volume, investors and traders can gain the knowledge required to make informed decisions when it comes to trading.
Learning about volume trends, data points, liquidity, and more can provide valuable insights into the stock market — helping you uncover profitable trades.
The stock market has many different trends that affect its price. These include the overall economy, interest rates, inflation, and other factors. Stock market volume is also a factor which influences stock market moves significantly.
Volume of stock market can be used to know the strength or weakness in the stocks or the stock market as a whole and take wise trading decisions.
What is Volume in Stock Market?
Volume in stock market refers to how much quantity of a security is traded in the stock market in any specific time period. It means the number of shares sold and bought in a specific time period. For example, 100 stocks of a company sold by a seller and same 100 shares bought by another trader make trading volume 200.
We can see the volume as bars on charts while doing technical analysis of stocks.
For futures and options (F&O) trading, trading volume means the number of contracts sold and bought in a specific time period.
Data showing trading volumes is uploaded by respective stock exchange websites daily at the end of the day. Alternatively, stockbrokers and some third-party website also publish this data. The data for volume of trade is made available for market indices as well as individual stocks.
Why Does Stock Market Volume Matter?
Stock market volume is an indicator of investor confidence in the economy. If investors believe the economy will improve, they’re more likely to invest in stocks. This means when there’s high volume, the investors think the economy is improving.
To understand the importance of volume further, we’ll first have to understand what a trend is. A trend is when prices go up or down over a period of time.
Trending markets tend to move in one direction. Trends are usually defined by volume. If there’s more buying than selling, then the market is trending higher.
Simultaneous price increase volume increase shows the inherent strength in the market up move due to participation of large number of traders and investors. It gives confidence to the buyers that the price up move is likely to be sustainable.
If there’s more selling than buying, then the market is moving lower. It shows that something is wrong there fundamentally. Large number of traders and investors are selling the security. Hence, it might not be prudent to invest there.
Trends usually last longer than a day. Once you’ve identified a trend, you need to determine whether it will continue. This is called identifying a breakout.
Breakouts occur when the price breaks out above or below its previous high or low. Breakouts happening with high volumes are reliable. Those happening with low volumes are more likely to fail.
Technical analysis helps traders to watch the volume activity along with price action for financial securities on technical charts. Volume is shown in the form of bar graphs on these charts. High volume day bars are taller than low volume days.
Moreover, higher volume provides more liquidity to the trading security. High liquidity is useful to traders as it allows them to enter or exit a trade easily and quickly. High liquidity also ensures small gap between bid and ask price for trading thus providing more appropriate entry or exit from a trade.
How Can I Use It to My Advantage?
There are several ways you can use stock market volume as a signal to help you make better investment decisions. First, you can use it to determine whether to buy or sell a particular security. Second, you can use it as a leading indicator of future performance. Third, you can use it when determining how much money to allocate to different asset classes.
Once you’ve identified a trend on the chart, you need to know how to trade stocks.
You should start looking for opportunities to buy low and sell high the up-trending stocks. This means buying shares at a lower price than where they’re currently trading and selling them at a higher price.
The stocks in down trend are ideal candidates for short selling. You sell them higher and buy them later at lower price to pocket the profits.
When a market trends, it tends to stay trending until something happens to change its course. If the trend continues, then the next thing to watch for is a reversal. A reversal occurs when the price goes back into the direction it was previously moving.
Why Do We Care About The Volume?
One reason why we care about stock market volume is because it’s an indication of investor sentiment. If investors are buying shares, then there must be some good news out there. This means that the company has done well and is likely to continue doing so.
On the other hand, if investors are selling shares, then there must something bad going on with the company. It might be that the company is having financial trouble, or it might be that the company has been caught up in a scandal. Either way, the fact that investors are selling shares indicates that there is something wrong with the company.
Price volume analysis gives very useful information to the traders and investors for taking learnt decisions. In fact, it is must that you give adequate attention to stock market volume while studying technical charts before making a trading decision.