How to Use Volume Trading in the Stock Market

Volume analysis in trading

A simple fact which every trader needs to remember when trading in the stock market is that it is an exchange and hence there is a demand and supply of stocks that are traded. The buyers and sellers determine the price of each stock. Volume at which a stock is being traded is a prime indicator for traders to understand which stock to invest in.

What is Volume in Stock Trading?

The volume of a share shows how many shares have been bought and sold over a particular period. Volume helps traders analyze trends and also enables them to gain insights on how other participants perceive the market. It plays a crucial role in technical analysis of stocks.

For example, a trader decides to buy 100 shares of Company A at Rs. 1,000 from a seller who is ready to sell the shares at Rs. 1,000. Here we can see that there is a match in the quantity of the shares being wanted/bought and the number of shares being given/sold. Here the volume of shares created is 100. The below table can help us understand the volume traded for company A in a particular day:

Sr. No Time of Trade No of Shares Bought No of Shares Sold Price Volume Cumulative Trading Volume
1 9.00 AM 100 100 1,000 100 100
2 10.00 AM 250 250 1,000.20 250 350
3 11.00 AM 400 400 1,000.50 400 750
4 12.00 PM 600 600 1,000.75 600 1,350
5 1.00 PM 300 300 1,000.10 300 1,650
6 2.00 PM 750 750 1,000.50 750 2,400
7 3.00 PM 900 900 1,000.75 900 3,300

How to read the Volume Trading table:

At 9 AM, 100 shares were traded at Rs. 1000. Following this, at 10 AM 250 shares were traded at Rs. 1000.20. Now, the cumulative trading volume is 350 (100 + 250). Note that the “volume” you see in the stock market tables is the Cumulative Volume i.e. the sum of all the volumes of the stock traded in that day. If the stock is highly active, then higher is its cumulative volume (i.e. the overall volume traded that day.)

Stock Trading Expectations using Volume Trading:

The Volume figure by itself does not indicate anything. However, when paired up with the stock price it will clarify a trader’s expectation from the stock as shown in the table below:

Sr. No Stock Price Stock Volume Stock Trading Expectation
1 Increases Increases Bullish (the market is on the rise)
2 Increases Decreases Should be an indicator of Caution (weak buying)
3 Decreases Increases Bearish (market is receding)
4 Decreases Increases Should be an indicator of Caution (weak selling)

We can now correlate this to how trading expectations are affected by change in volumes and share prices of a shares traded as shown in the table below:

Sr. No Time of Trade No of Shares Bought No of Shares Sold Price Volume Cumulative Trading Volume Stock Trading Expectation
1 9.00 AM 100 100 1,000 100 100
2 10.00 AM 250 250 1,000.20 400 500 Bullish
3 11.00 AM 400 400 1,000.50 600 1,100 Bullish
4 12.00 PM 600 600 1,000.75 350 1,450 Cautious (weak buying)
5 1.00 PM 300 300 1,000.90 400 1,850 Bullish
6 2.00 PM 750 750 1,000.95 250 2,100 Cautious (weak buying)
7 3.00 PM 900 900 1,000.65 400 2,300 Cautious (weak selling)

While trading in the share market, traders should consider studying the volume over an average of at least 10 days. To determine a high, low or average volume, here is a formula you can use.

  1. High Volume -> Current volume for the day > last 10 days average
  2. Low Volume -> Current volume for the day < last 10 days average
  3. Average Volume -> Current volume for the day = last 10 days average

Online trading tools can make it easier for a trader to conduct volume trading analysis. You can draw a moving average line on the displayed volume bars and see the average volume using these tools. They also provide a trader with real time stock price and volume tables.

To conclude, we can say that trading volumes do not have a direct effect on the prices of the stocks, but they do have an impact on the way the shares move in the stock market.

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