Trading Volume – An Introduction

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Below is basic article on Volume trading. More for newbies than anyone else.

Understanding stock volume

By: Christina Pomoni

Stock Volume or Trading Volume or Market Turnover is the number of shares or contracts traded on a stock exchange for a given period, usually one day, or a week.  

Stock Volume is an important tool of technical analysis as it provides indication about the sentiment of the market. When a large volume of shares is traded, investors can be quite certain that market prices are accurate, representing a consensus between many buyers and sellers. On the other hand, when a small volume of shares is traded, investors know that the price has been set by only a small number of individuals or organizations and it may not represent the true value. Therefore, the higher the volume is, the more reliable the market prices are.  

The correlation between volume and price indicates the market trend. There is a connection between a price change and a large volume, so if the ongoing price is shifting around a level of high volume investors should expect a price direction change.  

For technical analysis, trading volume is a supportive evidence of a trend. In particular:

When prices and volume rise, the upward trend continues and prices rise further

When prices rise and the volume decreases, the trend is unlikely to continue and prices either rise at a slower rate or start to fall.

When prices decrease and volume increases, the upward trend continues and prices fall further. So, variance between price and volume indicates increasing strength, even though the price is declining to anticipate a reversal trend. This is referred to as a selling climax and it is typically encountered at the termination of a bear market.

When prices and volume decrease, which is referred to as thin trading, the trend is unlikely to continue and prices fall at a slow pace or start to rise.

When volume is steady, the effect on prices is neutral. 

The correlation between volume and price helps investors to understand which prices cause the largest activity and volume. Advocates of technical analysis need to define where the majority of historical trading volume has taken place and find significant support and resistance lines. In addition, volume signals are covered in detail under volume patterns. Increasing prices and increasing volume signal an upward trend, and so do decreasing prices and increasing volume. On the contrary, increasing prices and decreasing volume signal a downward trend and so do declining prices and declining volume.  

Conclusively, trading volume is a significant indicator of technical analysis, which assists investors to confirm price changes, but also to anticipate changes in price. In doing so, it   highlights specific market characteristics and provides signals to help forecast market movements. Conclusions can also be derived from the use of trend lines and price patterns.

About the Author

I work as a financial and investment advisor but my passion is writing, music and photography. Writing mostly about finance, business and music, being an amateur photographer and a professional dj, I am inspired from life.
Being a strong advocate of simplicity in life, I love my family, my partner and all the people that have stood by me with or without knowing. And I hope that someday, human nature will cease to be greedy and demanding realizing that the more we have the more we want and the more we satisfy our needs the more needs we create. And this is so needless after all.

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Article Source: stock volume

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