About Volume and Stock Markets

About Volume and Stock Markets

Stock Volume is the daily number of shares of a security that change hands between a buyer and a seller.

It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a stock purchases 100 shares from a seller then the volume for that period increases by 100 shares based on that transaction.

Volume is an important indicator in technical analysis as it used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move.

Volume is a trader's best friend. Few technical indicators give the experienced trader a better feel for the minds of his fellow traders and investors. The heights of their greed, the depths of their fear, the loudness of their panic, and quietude of their ambivalence. All of these emotional states are seen with volume.

Volume also shows us the footprints of big money, and unlike footprints in the sand, these footprints are there for all to see...and long after the fact. More immediate and less ambiguous than any complex indicator, volume pinpoints extreme tops and bottoms -or the areas of them- with amazing accuracy.

Additionally, unlike many indicators, volume is applicable to every timeframe. How can this be? Simple. Volume is simply a measure of sentiment, of human nature. And fortunately for us, human nature is the one ever-present constant of the stock market. Never forget that fact. Once you have your own emotions under control as a trader, knowledge of this profound fact will guide you ever after as reliably as the Northern Star guides a lone sailor across a vast sea.

Why is volume a trader's best friend.

Volume offers a complete picture of the market.

Volume can help determine the health of an existing trend.

Specialty volume for indexes and volume-based technical analysis are very good indicators for predicting index shifts.

Volume is the indication of supply and demand. It's defined as the number of units traded during a time period. This number is significant in that it supports the prevailing price trend.

The technical analysis of volume is a basic yet very important element of market timing strategy. Volume provides clues as to the intensity of a given price movement.

Minute-by-minute trading volume shows the reversal points of the market, and therefore when to buy and sell!

Currently when a change in sentiment occurs in the market, most people don’t find out until it is too late. This can be costly to an investor. Trading volume offers investors an invaluable tool to know when and where a change in sentiment is going to occur, and act accordingly.

Intraday volume helps you see where a stock is being repeatedly bought as it dips. Likewise, towards the end of a rally, a wide volume spike often signals that the move is at an end, at least short-term. If you weren't aware of it before, you should be starting to see why volume is a trader's best friend.

On-Balance Volume (OBV)
Devised by Joseph Granville, on-balance volume is a running total, which rises or falls every trading day, based on whether prices close higher or lower than on the previous day. OBV is a leading indicator, so it typically rises or falls before that of the actual prices. A new OBV high indicates the power of bulls, the weakness of bears and the likely resultant rise of prices. A new OBV low indicates an opposite pattern: the power of bears, weakness of bulls and a possible decrease in value. When OBV shows a signal differing from that of actual prices, it indicates that volume (emotion of the market) is not consistent with consensus of value (actual prices) - a shift in price, which would alleviate this imbalance, is imminent.

Accumulation/Distribution (A/D)
Accumulation/distribution is also a leading indicator pertaining to volume, but it takes opening and closing prices into account. A positive A/D indicates that prices were higher when they closed than when they opened; a negative A/D indicates the opposite. But the bull or bear winners are only credited with a fraction of each day's volume, depending on the day's range and the distance from opening to closing price. Obviously, a wide range between open and close produces a stronger signal A/D, but the pattern of A/D highs and lows is most important. If a market opens higher and closes lower, thereby causing A/D to turn down, an upward-trending market may be weaker than it initially appears.

The significance of accumulation/distribution lies in its insight into the activities of the distinct groups of professional and amateur traders. Amateurs as a group are more likely to influence the opening price of the market since these amateurs base their first trades on the financial news they have read overnight as well as on the corporate news that was issued by their favorite companies after market close. But as the trading day wears on, the professionals determine the day's ultimate results. If the professionals disagree with the amateurs' bullishness at the open, the professionals will drive prices lower for the close. When the pros are more bullish than amateurs, the pros will drive prices higher all day and into the close. As indicators for future trends, the activities of professionals are generally more important than that of the amateurs.

Open Interest
Shifting from our discussion of volume, we find open interest as the next major indicator of crowd psychology. Open interest applies to the futures market and refers to a reading of future contracts or options expiring at a certain time in the future. Open interest adds the total long and short contracts in the market on a given day, and the absolute value of open interest corresponds to a cumulative long or short position. Open interest only rises or falls when a new contract is created or destroyed - one long and one short seller must enter the market to increase the open interest, and one long and one short seller must close their positions for open interest to fall.

Open interest is only of interest (pun intended) when it deviates from its norm. An absolute value is of no interest (bad pun again intended). Open interest reflects the psychology of the market by way of the market's inherent conflict between bulls and bears. To move the open interest indicator up or down, both bulls and bears must be equally confident that their long or short position is correct (or incorrect). A rising open interest demonstrates that bulls are confident enough to enter into contracts with bears, who are equally confident in their bearishness to enter into the position. One group will inevitably lose, but as long as potential losers (either bulls or bears) enter contracts, the rise or fall in open interest will continue. But there is more to the open interest picture than immediately meets the eye.

This excellent post by Traderji seems to have got buried and forgotten...........great stuff as always from Traderji,for all those who haven't read it yet and have numerous questions on Volume and the market and Open Interest check it out.....

Saint

Thanks Saint, for digging out this excellent write up on Volumes and Open Interest. Really educative. I have also found some other great posts quite by accident in various threads here. I wonder if it's possible to have a thread (or a store house/library) on this site where copies of all such educative posts can be kept for reference by members?
Regards,
Jaspal

Hello Saint

How can one associate volumes in futures as volumes are unusually high due to arbitrage trading in cash/futures?

Please guide.

Alok

Thanks ,Traderji for this excellant post.

warm regards

karthik

Hello Jaspal,

If you are interested in doing so create a post with a description and links to the various topics/articles and I will make it a sticky at the top of the thread.

Unconfirmed news of Indiabulls scam out in market .. from mumbai offices . -- pls verify any ideas? what scam?

Hi,

I'm a learner and I've the following doubts.

1. Is it that for every buy/sell there should be an accompanying sell/buy respectively? (I think its true, then only it becomes a trade.).

This brings me to the second question.

2. How is the share actually traded? ie what happens in the stock exchange when we buy/sell a share. Lets consider a bearish market. There are n(say 100) numbers of sell orders. Who is going to buy that? (I think the day traders, seeing the 100 sell orders, go short for 100 shares. The prices go down. Then they cover using that initial 100 sell orders. If thats the case how is it possible to do so for all the n no. of sell orders?)

I tried to Google it, but couldn't find the answers.

3. I learnt that volume plays a significant role during any market reversals. I also learnt that volume "may not"
correctly comply with the trend breakout at times. So during any breakout(or any other areas where volume will be used for confirmation) how can we determine whether we
need to take the volume into account or not?

Thanks,
Praveen.

Hello Friend,

I will try to answer ur doubts taking them one by one and i hope to make it atleast a little clear. Though u will be able to find answers to ur doubts in the treasure trove of this forum.

1. Is it that for every buy/sell there should be an accompanying sell/buy respectively? (I think its true, then only it becomes a trade.).

2. How is the share actually traded? ie what happens in the stock exchange when we buy/sell a share. Lets consider a bearish market. There are n(say 100) numbers of sell orders. Who is going to buy that? (I think the day traders, seeing the 100 sell orders, go short for 100 shares. The prices go down. Then they cover using that initial 100 sell orders. If thats the case how is it possible to do so for all the n no. of sell orders?)

3. I learnt that volume plays a significant role during any market reversals. I also learnt that volume "may not" correctly comply with the trend breakout at times. So during any breakout(or any other areas where volume will be used for confirmation) how can we determine whether we need to take the volume into account or not?

Hope a made things a little clear.

Cheers
Gaurav