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Stock Market Volume - Understanding its Significance

By Edited Apr 2, 2016 2 2

Volume as a guide and tool

If you are in this investment field of the financial industry, understanding the role of stock market volume can give you a lot of advantages in profiting from your trades.. You can see in every trading day in stock exchanges like the New York Stock Exchange, or the NYSE for short, the market leaders and the market losers along with their respective stock volume. In the stock charts,. market volume is usually seen plotted as a line horizontally on a histogram. Volume basically tells us the number of stock shares bought or sold in a given point of time. If you would also take a look at the stock quotes, the trading volume of the traded security is also listed just below the market price.

Technical Analysis Indicator: Interpreting Volume of the Stock

The volume in a stock market chart is one of the favorite tools for technical analysis.Just like in any business of analyzing money, traders use volume in shaping the strategy of their daily transaction. Professional traders know stock volume plays a very significant role in their technical analysis. The volume of the stock market chart can give you good study of chart analysis signals . If the daily stock price of a company moves up with heavy volume, compared to the last few days or week, this would tell the you that the move is serious and that there is a chance that it could even move up further. Likewise, if a stock price moves down with heavy volume, you would usually sell the stock either by selling their shares or shorting it. This is why you have to keep track of the market volume leaders, markets actives, and the volume index. Another example would be what if the stock market price of a listed company goes high enough but without significant volume? The professional traders would usually exercise caution with the stock by watching its next move. They do this because there is the danger of stock manipulation. Also, if the change in the stock price has gone too high expert traders would just then skip the stock.

Importance of Stock Volume

Just like in options, futures, forex, and stocks, investors measure a great deal of their market investment. They do a lot of trading shares analysis of their chosen stock and in any given number of period. Investors only invest their big amount of money in stocks where there is  an added security that they will be profitable. Institutional investors like pension funds, mutual funds and investment banks hold billions of money. They invest this big amount of money in the different stock exchanges of the world in behalf of their clients. Since, this is a huge amount of money, they need listed companies with high liquidity or  huge amount of market capitalization. This is the reason why they take a look at the amount of shares traded at each company to determine if it is liquid or not. A stock having a high amount of liquidity can let a professional investor buy company shares as near to the desired market price as possible. They don’t want to see volatility or big spread in the price when they buy market shares like the price going higher.. Likewise, when they sell shares of a company, they don’t want to cause a big fluctuation in the price while they are selling or distributing their shares.

A stock market price going higher  with a significant amount of volume would tell you that the market trend is strong and that there could still be an extension coming. Very good and experienced traders also know that a stock price that has gone high in the last few days let’s say by more than 30% and then traded the biggest volume for the latest day compared to the days before, but only moved very little, could mean that the end of the trend is coming. It could be the start of the early stages of a reverse. If this reversal of the price trend is accompanied by high volume, we could then say that stock market distribution is underway and traders are profit-taking already.

Stock Volume: Stock Accumulation and Stock Distribution

Usually before a company’s stock price goes up, there would be accumulation going on without much change in the stock price for days. Reading the volume chart of  a stock company and comparing the high volume today to the past days could give ideas that there is someone silently buying the stock. Traders would then put these kind of stocks in their watchlist. Likewise volume is an important market data that can offer significant clues if the support level of a stock that has been penetrated by sellers is serious or not.

At the same time,. stocks with good volume supports denies shorters who want to short at the top range of the stock. Understanding stock volume  chart can give a lot of profitable opportunities for a trader when they are pushing price higher

 Volume Breakout

Volume , as stated earlier, represents the traded security’s amount of shares or contracts that are exchanged between buyers and sellers. Volume can tell if a breakout of a stock upwards is strong or weak. An upward breakout means that a previous high price of a stock, where sellers of the stock are usually dominant, has been breached convincingly. The buyers have overwhelmed the sellers.

Volume Patterns Work

Since normal volume tracks the number of shares in the buying selling of the different listed stocks, it is a good stock indicator.  A stock trading at a low volume, reflecting an illiquid stock, can only mean that a stock has a low commitment from the investing public. With a good understanding of stock charts volume, professional traders can increase their chances of profiting more in the stock market industry. Volume can tell who wins and loses between buyers and sellers. Good volume gives legitimacy to the price action movement of the stock.



Jul 12, 2012 8:59pm
Thumbs up, and welcome to IB!
Jul 12, 2012 11:43pm
thanks Capstone!
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