What is Volume in the Stock Market?
Simply put, volume is the total number of shares (or contracts) traded during a specific period of time. Volume is usually denoted with the help of a bar chart just beneath the price chart with each bar reflecting the number of shares that exchanged hands during a specific time period. If we are looking at a daily chart, each bar would indicate how many shares were traded during that day. Similarly, if we are looking at a weekly chart, the volume plot would indicate how many shares were traded during the whole week and so on and so forth.
Importance of Volume
Volume plays a pivotal role in confirming trends. It is the underlying energy or fuel that drives price. Just like a rocket requires propellant to provide it the required thrust to lift off and propel higher, prices require volume to propel ahead and sustain a trend. A trend continuing on good volumes is likely to persist while a trend continuing on lighter volume is susceptible to a reversal sooner or later.
Similarly, volume analysis can also be used to confirm chart patterns. A breakout on high volumes often results in a strong move, while a breakout on low volumes may often result in failures. Volume is the lifeblood that drives the markets.
Volume Interpretations
- If volume increases as prices advance, it indicates that the upward trend is strong and is likely to continue higher.
- If volume decreases as prices advance, it indicates that the upward trend is weakening and a trend reversal may soon follow.
- If volume increases as prices decline, it indicates that the downward trend is strong and is likely to continue lower.
- If volume decreases as prices decline, it indicates that the downward trend is weakening and a trend reversal may soon follow
Technical Analysis is as much of an art as a scientific endeavour. While chart patterns facilitate the artistic aspect, volume analysis facilitates the quantitative aspect of one’s analytical prowess. One without the other is of little help otherwise. It is when we combine the aforementioned price and volume relationships is when we are able to take an enlightened and objective view of the markets to take more informed decisions.
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