Volume is a measure of how much of a given financial asset has been traded in a given period of time. Volume information can be found just about anywhere, but few traders or investors know how to use this information to increase their profits and minimize risk. For every buyer, there needs to be someone who sold them the shares they bought, just as there must be a buyer in order for a seller to get rid of his or her shares. This battle between buyers and sellers for the best price in all different time frames creates movement while longer-term technical and fundamental factors play out.
Using volume to analyze stocks or any financial asset can bolster profits and also reduce risk. The Importance of Volume. When analyzing volume , there are guidelines we can use to determine the strength or weakness of a move. As traders, we are more inclined to join strong moves and take no part in moves that show weakness — or we may even watch for an entry in the opposite direction of a weak move.
These guidelines do not hold true in all situations, but they are a good general aid in trading decisions. A rising market should see rising volume. Buyers require increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume show 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 or rise on little volume is not a strong signal.
A price drop or rise on large volume is a stronger signal that something in the stock has fundamentally changed. In a rising or falling market, we can see exhaustion moves. These are generally sharp moves in price combined with a sharp increase in volume, which signal the potential end of a trend.
Participants who waited and are afraid of missing more of the move pile in at market tops , exhausting the number of buyers. At a market bottom , falling prices eventually force out large numbers of traders, resulting in volatility and increased volume. We will see a decrease in volume after the spike in these situations, but how volume continues to play out over the next days, weeks and months can be analyzed using the other volume guidelines.
Volume can be very useful in identifying bullish signs. For example, imagine volume increases on a price decline and then the price moves higher, followed by a move back lower. If the price on the move back lower stays higher than the previous low and volume is diminished on the second decline, then this is usually interpreted as a bullish sign. After a long price move higher or lower, if the price begins to range with little price movement and heavy volume, this often indicates a reversal.
Know the Difference for additional information. On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout indicates lack of interest and a higher probability for a false breakout. Volume should be looked at relative to recent history. Comparing today to volume 50 years ago provides irrelevant data. The more recent the data sets, the more relevant they are likely to be.
Volume indicators are mathematical formulas that are visually represented in most commonly used charting platforms. Each indicator uses a slightly different formula, and therefore, traders should find the indicator that works best for their particular market approach.
Indicators are not required, but they can aid in the trading decision process. OBV is a simple but effective indicator. Starting from an arbitrary number, volume is added when the market finishes higher, or volume is subtracted when the market finishes lower.
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 is increasing at a slower rate or even beginning to fall.
The Way to Smart Money. Rising prices should be accompanied by rising volume, so this formula focuses on expanding volume when prices finish in the upper or lower portion of their daily range and then provides a value for the corresponding strength. When closes are in the upper portion of the range and volume is expanding, the values will be high; when closes are in the lower portion of the range, values will be negative.
Chaikin money flow can be used as a short-term indicator because it oscillates, but it is more commonly used for seeing divergence. Figure 6 shows how volume was not confirming the continual lower lows price in Apple stock.
Chaikin money flow showed a divergence that resulted in a move back higher in the stock. Fluctuation above and below the zero line can be used to aid other trading signals. The Klinger volume oscillator sums the accumulation buying and distribution selling volumes for a given time period. In the following figure we see a quite negative number — this is in the midst of an overall uptrend — followed by a rise above the trigger or zero line. The volume indicator stayed positive throughout the price trend.
A drop below the trigger level in January signaled the short-term reversal. The price stabilized, however, and that is why indicators should generally not be used in isolation.
Most indicators give more accurate readings when they are used in association with other signals. Volume is an extremely useful tool, and as you can see, there are many ways to use it.
There are basic guidelines that can be used to assess market strength or weakness, as well as to check if volume is confirming a price move or signaling a reversal. Indicators can be used to help in the decision process. In short, volume is a not a precise entry and exit tool — however, with the help of indicators, entry and exit signals can be created by looking at price action , volume and a volume indicator. For additional reading, take a look at Interpreting Volume for the Futures Market.
Dictionary Term Of The Day. A reduction in the ownership percentage of a share of stock caused by the issuance Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. Analyzing Chart Patterns For every buyer, there needs to be someone who sold them the shares they bought, just as there must be a buyer in order for a seller to get rid of his or her shares. Basic Guidelines for Using Volume When analyzing volume , there are guidelines we can use to determine the strength or weakness of a move.
Volume and Market Interest A rising market should see rising volume. A GLD daily chart showing rising price and rising volume. A GLD daily chart showing a volume spike indicating a change of direction.
A SPY daily chart showing a lack of selling interest on the second decline. Volume and Breakouts vs. False Breakouts On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. A QQQQ daily chart showing increasing volume on breakout. Volume Indicators Volume indicators are mathematical formulas that are visually represented in most commonly used charting platforms.
An AAPL minute chart showing divergence that indicates a potential reversal. A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. Passive investing is an investment strategy that limits buying and selling actions.
Passive investors will purchase investments How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, No thanks, I prefer not making money.
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