Trading Volume: Analysis and Interpretation

Next, volume can give you hints as to when a stock is being possibly accumulated. This is one example of how we can see volume increasing, while price is basing. So in this example, 24 million shares is not a lot of volume, in relation to the 1.33 billion shares that are available to trade.

Factors like volume are useful to confirm your market analysis, but should never form the foundational basis for that analysis. I’ve seen markets go through dramatic, extended price changes with barely a blip of change in either volume or open interest. Many people see this as a contrarian indicator because if more traders are buying those could be retail traders but the banks would be selling.

Everything You ever wanted to know about our volume strategy for trading.

The math here is very straightforward, but you will require an Intraday Chart. Choose your desired time period, such as 10 minutes, and then count the number of ticks during that time period in the Intraday chart. A tick, in trading markets, such as stocks, futures, or Forex, is the smallest increment by which these trading instruments can move.

ADTV is used by traders to ensure that a stock has enough liquidity and that the supply and demand of other traders is in their favor. Working with an adviser may come with potential downsides such as payment of fees . There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest. This helps control risk as you can reduce losses where you want with minimal price slippage. It also makes collecting your profits easier because many other traders will want to take your position when you are satisfied with your profits.

Volume Precedes Price Action!

Volume can also be used to determine when the market has gotten exhausted with the direction of a particular stock. When there’s a sharp change in the price and a sharp increase in volume, it suggests the trend could be ending. Investors who are afraid of missing out tend to buy high, resulting in a sharp increase in volume. However, when everyone has bought a stock, the security price often stagnates and then falls because the market has exhausted all buyers interested in the stock. Smart money always seeks to mask its trading activities, but its footprints are still visible. Here is another strategy on how to apply technical analysis step by step.

Volume is one piece of information that is often neglected by many market players, especially beginners. However, learning to interpret volume brings many advantages and could be of tremendous help when it comes to analyzing the markets. Michelle Jones is editor-in-chief for ValueWalk.com and a daily contributor for ValueWalkPremium.com and has been with the how to increase trading volume sites since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. Instead, it makes more sense to look at volume as part of the big picture when evaluating a particular stock.

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On the one hand, volume simply measures how much a given currency pair has traded over any given period of time. Volume is used to measure the strength and weakness of a trend. As a general rule, a strong trend should be accompanied by rising volume. At the same time, a sharp rise in volume can also signal the potential end of a trend. It is the equivalent of focusing on the next result instead of analyzing the process. All it knows is how many ticks it moved, regardless of the fact if 100 trades were involved or 10,000.

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 https://xcritical.com/ is increasing at a slower rate or even beginning to fall. Indicators are not required, but they can aid in the trading decision process.

Why Use Volume Indicators?

The main idea is there’s a higher volume when the price is moving in predominant trend direction and less volume when the price is moving against the main trend. So if the main trend is up, the volume is expected to be high for a trading session that closes up, and in a downtrend, the volume should be high for sessions that close lower. You would like a growth stock to finish a breakout session with that volume % change number at least 40% for the entire day.

The volume price trend indicator helps determine a security’s price direction and strength of price change. Buyers require increasing numbers and increasing enthusiasm to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, and this is a warning of a potential reversal. This can be hard to wrap your mind around, but the simple fact is that a price drop on little volume is not a strong signal.

Key lessons learned

Together with other technical tools, volume indicators can be used for several strategies. Although there is a difference between tick volumes and actual traded volumes in spot forex, studies have shown the existence of a high positive correlation between the two. Correlations of more than 90% have been found between price updates and real volume.

• He’s passionate about building great software that delights users.
• The Chaikin Money Flow indicator can also be used to confirm the strength of a breakout.
• Even though this is not about Forex trading, it will give you a lot of context for the Forex market, later in this post.
• Investors who have high conviction about the stock in the long term might want to wait for a pullback before buying it if recent stock price gains were on low volume.
• Conversely, if the volume is low, then the move is viewed with less significance.
• The OBV is a volume-based momentum oscillator, so it is a leading indicator — it changes direction before the price.
• He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

The MFI’s overbought and oversold territories are used to signal potential entries. Since moves into these zones are rare, traders who use the MFI are fairly confident when they can take a trade based on one of these readings. Personally, I use TradingView to trade, so that’s the platform I share all of my examples in. That said, all 4 of these indicators are available on a wide range of trading platforms. Doing so ensures there is sufficient liquidity to prevent your own buying and selling from directly affecting the stock’s price. The more shares that are traded each day, the higher the liquidity of that stock or ETF.