Volume in the stock market is an indicator which measures the number of stocks traded over a specified period of time. It indicates the level of activity and liquidity of a security. Volume can also help traders to identify the strength and significance of price movements.
Since, Volume helps a trader to identify the strength and significance of the price movements it can be a very useful indicator to check that the movement is genuine or a false move.
According to Dow Theory, when the market is moving in the favor of a major trend (also known as an impulse move) then the volumes should be increasing and when the price moves in the opposite direction (also known as the correction phase) of the major trend then the volumes should be decreasing.
This was a short introduction to the topic that we are going to discuss today in this following article.
What is Trading Volume?
Volume in the stock market is an indicator which measures the number of stocks traded over a specified period of time. It involves the buying and selling of an underlying asset. Volumes also indicate the level of activity and liquidity of a security. Volume can also help traders to identify the strength and significance of price movements.
Volume helps several investors and traders to analyze the trends and patterns in the stock market. Whether an investor is talking about the entire stock market or about a certain individual stock, the information of volume can be found anywhere.
The volume also means the total number of transactions done in the particular underlying asset in a specific time period. This includes both buying and selling orders of an underlying asset.
The trading volumes are being published by the stock exchange for each trading session in the stock market. Volume is termed as the total volume of all the stocks and individual stocks that were traded in the stock exchange.
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Where To Find Trading Volumes?
Since, all the stock exchanges keep an eye on the volumes in underlying assets or even in indices as well, it is easy to access the information.
There are several ways by which an investor can access this information. Some of them are news, websites or through third party websites that upload information related to the stock market.
Many investment platforms make use of candlestick charts to show volumes of a particular stock for a particular time frame. In this chart, the green color shows the buying volumes, and the red color shows the sell volumes.
However the trading volumes between National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) would be completely different.
What Does Stock Volumes Show?
The stock volume shows that the activity in a stock has started. This means that whether an investor or a trader buys or sells an underlying asset it is being recorded in the volume metric.
If the volume of a stock appears to be higher than average then this means that traders and investors are interested in the following stock and a lot of transactions are being done in an asset. Now, this interest can be both negative and positive which means that the negative talking can result in the price reversal.
High volume tells the investors the number of timeshares that have been exchanged in the stock market. Hence, the volume in the share market tests liquid and market activity. Liquidity means the investor can get back their money easily when there is a sell order. When there is a high volume in the market, it means there are more sellers and buyers in the market.
In a single trading session, the volumes remain high during the opening and closing of a session as intraday traders book and close their positions in a hurry before the session ends.
How Volume And Price Are Related To Each Other?
If the trading volume is high in any of the assets, it will have a high impact on the stock price but it does not mean that the volume is the only thing which will impact the price of an asset. There are a lot of different factors which impact the price of an asset.
Here are four conditions in which the volume can be used to confirm your trades and in which the volumes are going to impact the price most:
- If the price of an asset increases with the higher volumes then we can say that the trend is strong and genuine.
- If the price of an asset increases with the lower volumes then we can say that the trend is weak and can reverse in future.
- If the price of an asset decreases with the higher volumes then we can say that the trend is strong and genuine.
- If the price of an asset decreases with the lower volumes then we can say that the trend is weak and can reverse in future.
Conclusion
Trading volumes are a great way to trade in the favor of the major trend and also it is a great indicator which helps a trader or investor to check the strength of a trend. It is useful to check if a move is genuine or a false move but again reading trading volume will require time and hard work just like any other price action concepts so being patient is really important.