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Volume in Trading

Volume is the total number of shares traded over a period of time, usually daily. It is an important technical indicator that can provide insights into the strength of price movements and likelihood of trends continuing or reversing. Specifically, increasing volume on price rises suggests a strong uptrend, while decreasing volume on price drops signals a potential reversal. Volume is also useful for identifying false breakouts from ranges or patterns. Traders prefer waiting for moves accompanied by high volume as confirmation that big investors are participating in the trend.

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Ahmed Saeed Abdullah
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200 views

Volume in Trading

Volume is the total number of shares traded over a period of time, usually daily. It is an important technical indicator that can provide insights into the strength of price movements and likelihood of trends continuing or reversing. Specifically, increasing volume on price rises suggests a strong uptrend, while decreasing volume on price drops signals a potential reversal. Volume is also useful for identifying false breakouts from ranges or patterns. Traders prefer waiting for moves accompanied by high volume as confirmation that big investors are participating in the trend.

Uploaded by

Ahmed Saeed Abdullah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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VOLUME IN TRADING

Significance of Volume in Trading


One of the most overlooked technical parameters is Volume in trading especially by
beginners, but as this is the most worthwhile technical parameter you should try to get to
grips with this metric and to include it in your preparation. Knowing what other investors are
trading is important for understanding what stocks are in play and which are likely to make
big moves. Volume is one of the simple tool that works and help in identifying these big
moves.

What is Volume?
Volume is basically the total number of buyers and sellers exchanging shares over a
particular period of time usually a day. The share is more active when the volume is high.
The data on volume of a share is readily available on the charts or the trading screen. Most
financial sites have data on volume,

For Example:
If the volume of the stock for the day was 1,500,000 shares which mean that 1,500,000 shares
were sold by someone and someone bought those shares on that day.
Volume may not be an attractive piece of information but you combining the volume data
with resistance and support levels give a clear picture.
For example:
Say stock A ltd. broke a resistance level and went further. But if the stock has broken the
resistance with volume then it may move further up. Let us consider that the volume traded
on that day the total number of shares exchanged were 3 lakhs. Say on a normal day 10 lakhs
shares are traded. This means the volume was below the average for that particular day. It
means that all the big investors were not trading and decided to be bearish on the stock. They
sell the stock which causes panic. The very next day the stock goes down. This is the
importance of “volume”. Traders do not buy the stock unless it breaks a critical level and
unless the volume is high. If the stock goes down with little then it also means the same thing.

So any break of critical support and resistance level is not valid unless there is high
volume. Volume should move along with the trend. If prices are in an uptrend then volume
should increase along with the trend

Basic Guidelines for using Volume:


VOLUME IN TRADING
When we analyze volume in trading there are some guidelines which we can use to determine
the weakness or strengths of a move. The below guidelines are not true in all the situations
but they help in trading decisions:

1. Volume and Market Interest:


A rising market should have rising volume. Buyers should be increasing to keep the prices
moving high. Increasing price and decreasing volume is a warning for a potential reversal.
Price rise or decrease on little volume is not a strong signal whereas a price rise or decrease
on large volume is a strong signal.

2. Volume and Reversals:


Volume plays an important role in identifying reversals signs. When the volume decreases
and prices are also falling then it generates a bullish signal and similarly when the volume
decreases and the prices are rising then it indicates bearish signals.
VOLUME IN TRADING

3. Breakouts vs. False Breakouts


VOLUME IN TRADING
On the initial breakout from the range or chart pattern, a rise in the volume indicates strength
in the move. Little change or decline in volume on a breakout indicates a false breakout.

Why Volume in Trading is Important?


As discussed above volume is used by technical analysts to confirm trends and chart patterns.
The strength of any price movement is measured mainly by volume.

1. Volume and Chart Patterns:


Volume plays a major role when confirming chart patterns, like triangles, head and shoulders,
flags, etc. If the volume isn’t present with these chart patterns then the trading signal isn’t
that reliable.

2. Volume precedes price:


Technical Analysts closely analyze the volume to see when reversals are about to occur. If
the volume is decreasing in an uptrend then it can signal that reversal may take place soon.

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