Understanding Volume and its Significance in trading Give a common example other than equity while explaining volume – if possible Volume measure how many times any financial asset whether be currency, commodity, equity etc is bought or sold during a particular period of time.

Understanding Volume and its Significance in trading Give a common example other than equity while explaining volume – if possible Volume measure how many times any financial asset whether be currency, commodity, equity etc is bought or sold during a particular period of time. Traders usually ignore volume when they analyze charts. But they forget that volume is the most critical technical parameter and it gives vital information about the number of shares that have been exchanged between the buyers and sellers.

What is Volume? Volume is defined as the total number of shares traded during a specific period between the buyers and sellers. Volume in simple terms gives a fair idea about the popularity of the script for the time periodbeing analysed. If the volume is high, then it means that stock is actively being traded in the market because of any news or any other factor. This may result in a big move in the prices which can help traders to make profits out of this move. The data on the volume of a share is readily available on the charts or the trading screen. Most financial sites also have data on the volume.

For example: Let us say that on a day, the total volume traded was 5 lakh, and on any other day, the average traded amount is 10 lakh shares. This means that volume was below the average on that particular day. From this information, we can derive that prominent investor had a bearish view on that particular stock. They sold the stock and caused panic due to which on the next day, the stock prices go down. After this example, you may have got a slight idea of the importance of \”volume.\” Traders usually do not buy the stock unless it breaks a critical level with high volume. Therefore any break of support and resistance level is not confirmed unless volume rises.

Now let us discuss the importance of volume in trading: Chart Patterns: Any patterns formed in the charts are not confirmed unless volume supports it. If the volume isn\’t present, then the buy or sell signals given by these chart patterns cannot be reliable.

For example: In the weekly chart of Tata Chemicals, a double bottom formation took place a few weeks ago. We can see a rise in the volume on the day of the breakout of that pattern. Reversals: Volume can also be used to confirm if any reversals are going to occur. If the volume is decreasing in an uptrend, then this may indicate that reversal may take place and traders should be cautious while making new trades. In the same weekly chart of Tata Chemical, we can see how prices are in an uptrend, but volume is decreasing week by week. Therefore traders should be cautious of any reversals that may take place while trading the uptrend.

Breakouts: As we have discussed above, the volume should rise at the breakout of any chart pattern or that chart pattern will not be a valid chart pattern. Now you must know how vital volume is while analyzing technical charts. Please summarize . the below sentence is nice but needs an additional summary before it. Volume analysis helps the traders to identify if any buying and selling activity going in the stock which helps the traders to make trading decisions whether to long or short the stock. Volume also helps in identifying momentum and helps in confirming the ongoing trend of the stock. But remember as other technical indicators momentum or trend indicators, volume should also be used with other indicators and not solely.