Everything to Know about Using Volume in Stock Market Trading

To be successful in the stock market, investors perform technical analysis to study a stock’s long-term trends and identify good entry and exit points. Volume in the share market is one of the most significant technical parameters that help you determine where stock prices are heading.


This indicator measures trading activities for a particular stock within a certain period. Trading volume reflects the overall market sentiment for security which tells how investors view it at a specific time. Read along to know why volume in trading is so important and how to use it.




What Is Volume in the Stock Market?


The trading volume of a particular stock refers to all shares that investors have traded in a specific time. In other words, it relates to all claims that traders bought or sold at a particular time. For futures and options (F&O), it refers to how many contracts changed hands. 


Let us say that a seller sold 4000 shares of XYZ, and a buyer bought 4000 shares. In this case, the stock’s trading volume will be 4000 for the transaction. 


After price action, trading volumes are a closely watched market indicator (movement of a security’s price over time). You can check the trading volume for any financial instrument, including stocks, bonds, F&O, derivatives, commodities, etc. 


Investors use this indicator to check if a market trend will exist, continue or reverse. For example, if a stock’s trading volume moves upward in a particular session, its prices will likely increase. The 10-day average trading volume allows you to check a stock’s liquidity on the counter. 


Where to Find Volume in the Share Market?


Stock exchanges like NSE and BSE publish the volumes of all listed stocks for each trading session. You can check the volumes of individual stocks and the total volume of all stocks that investors traded on the exchange. Moreover, you check the overall trading volume of indices like the Nifty 50 or Sensex.


All trading charts and platforms show trading volumes throughout the day and other information. On some charts, volume is displayed as a vertical bar indicating the trading volumes of a stock over time. Usually, volume bars are colored red or green, with red representing the net selling volume and green representing the net buying volume. 


You can check the volume in trading of a particular stock from the following sources:

  • On the website of stock exchanges (BSE or NSE) 
  • News sites and third-party websites that update such information
  • Though your broker or investment platform
  • Many investment platforms show candlestick charts to show volumes. 
  • There are also volume charts for different periods like hourly, daily margin statement, 200-day charts, etc. 


It is important to remember that trading volumes on NSE and BSE will differ for stocks present on both exchanges. There is usually a slight price difference on each exchange for a particular stock. 


What Are the Uses of Trading Volume on the Share Market?


Volume represents traders’ interest in a particular stock. It helps them analyze trends and patterns in the share market as this metric records all buying and selling activities. Higher volumes may indicate more interest in a share, and lower volumes may represent a downtrend, though this is not always the case. 


A high volume of stocks may indicate that several activities are happening. It could mean a positive action where interest in a stock is increasing. Alternatively, there might be negative interest if many people sell it off. As noted above, the trading volume also shows liquidity.


Liquidity refers to how many stocks you can buy or sell without affecting the market. Higher liquidity means that there are many buyers and sellers in the market. As a result, you can quickly sell your shares and get back your money. 


The trading volume helps you find breakouts, breakdowns, false breakouts, and other stock market indicators. It is also helpful for investors carrying out fundamental analysis of stocks. In addition, intraday traders check trading volumes on the stock market before buying shares.


Although volume is an essential metric, you need to use volume analysis with other technical indicators. A rise in volume does not necessarily mean breakouts or breakdowns, mainly due to algorithms that know what price levels will trigger considerable changes. 


What Does Trading Volume in the Share Market Tell You?


A change in trading volume can show the following things:


  • A change in market trend: A rise in volume could indicate rising share prices, and buyers will want to increase their stakes. This would continue to push prices further up, which would continue to increase participation. However, a decrease in share price with increasing trading volume may suggest a reversal.  


  • Exhaustion moves: Exhaustion movements are sharp price changes accompanied by a sharp increase in trading volumes. Such movements indicate the end of an ongoing trend, such as the start or end of rising or falling markets. 


When many participants are afraid of missing out on investing in a stock, it exhausts the number of buyers in the market. In contrast, a decrease in price forces out swathes of traders from selling a stock. After an initial spike, the trading volume in the stock market decreases.


  • Momentum: Momentum in the stock market refers to the rate at which stock prices change, indicating a new trend. Bullish momentum happens when sharing costs in the market increase, while bearish momentum happens due to falling share prices.


The Moving Average Convergence Divergence (MACD) is one of the most widely used momentum indicators among traders. It compares the moving average of any time to estimate the future direction.


Correlation of Share Price and Trading Volume


An analysis of share prices against trading volume tells us the market’s direction. While volumes help you find the existence of a particular stock trend, it does not decide if stock prices will move. Therefore, we can view trends in stock prices along with trading volume to understand the current market trend.


The following describes the likely trends due to the movement of prices and volume of a stock:


  • When both the stock price and volume increase, a bullish market where share prices are likely to continue rising. As the number of buyers and sellers increases, buyers will be willing to enter at higher prices. This would increase the overall participation in the stock.  


  • When prices increase, but the volume decreases: This situation means that there are few new investors while the prices continue to grow. This is because investors fear a price reversal and are not interested in the stock. 


  • When volume increases but price falls, more people are buying and selling the stock even though its price continues to fall. It indicates a strong bearish market with possibilities of short-selling happening. Investors will likely be interested in the stock though the chance of the share price falling further is high. 


  • When both stock prices and volume falls: There will be a shortage of both buyers and sellers in the market. It is a bearish market, where stock price and interest in the stock are both falling. It could also be an early sign of a bullish reversal (i.e., stock prices increasing), but this may or may not occur. 


Indicators of Volume in the Share Market


The following are some of the different indicators of volume in the stock market and their usage:


  • On Balance Volume (OBV)

OBV is a simple indicator that calculates the buying and selling pressure to predict stock prices. It adds up share volume during days of uptrends and deducts volume during downtrends. 


When the stock prices and OBV make higher peaks and troughs, upwards trends are likely to continue. On the other hand, downtrends are possible when the price and OBV make lower peaks and troughs.  


  •  Money Flow Index (MFI)

MFI is a movement and volume indicator that checks both time and price for measuring buying or selling pressure. It is similar to RSI but also incorporates the trading volume of stocks. This indicator provides trading signals when stocks show bullish or bearish divergence or are overbought/under-bought.


  •  Negative Volume Index (NVI)

This is a cumulative indicator that checks the activity of intelligent money using the change in trading volume. NVI works under the supposition that smart money is active when trading volumes are low. 

Institutional money is called smart money, as large institutions tend to make ‘smarter’ moves than retail traders. Following smart money is considered a wise idea as it often results in bullish changes in stock prices. 


  • Volume Relative Strength Index (RSI)

The volume RSI is similar to RSI, but it is calculated using up-volume and down-volume instead of price changes. Investors can check the variation of this indicator around the 50% centre line to know the market trends.

A volume RSI above 50% indicates bullish volume trends, while below the 50% line indicates bearish trends. 


  • Accumulation Distribution line

The A/D line uses the cumulative inflow and outflow of money for stock to measure its volume. You can use this indicator to detect positive/negative divergences in price and volume and understand the price movements in advance. 

A high positive multiplier and trading volume indicate intense buying pressures. On the other hand, a low number of high-volume shares shows that the stock might be under solid selling pressures.


  • Chaikin Money Flow (CMF) indicator

This refers to a method invented by Marc Chaikin and is used to measure buying and selling pressures. This volume indicator measures the amount of money flow over a look-back period, usually between 20 to 21 days.

A CMF value above the zero line shows uptrends, while a value below zero indicates weakness in the market. 


  • Klinger oscillator


Developed by Stephen Klinger, the Klinger volume oscillator compares the price and traded volume of a share and converts the results into an oscillator. It helps to determine the long-term trend of money flow and short-term fluctuations of a specific stock.


Traders can use the Klinger oscillator to study divergences that could show signs of price reversals. They can use this tool in conjunction with chart patterns to look for indications of a breakout or a breakthrough. 


Final Word


Volume in the stock market is an essential metric for any investor or trader figuring out the price movements of stocks. Using it correctly lets you estimate everything from market trends and reversals to signs of bullishness and buybacks. However, it is better to use trading volume, share price, and other technical indicators to get more accurate estimates.


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Frequently Asked Questions


  •  Is trading volume an essential factor in intraday trading?

Yes, knowing the trading volume of  stock is essential for intraday trading. This is because it lets traders know the liquidity levels of a stock and how easily it can enter or exit a position. 

Intraday traders tend to prefer stocks with high average volume as it allows them to get in and out of a position quickly regardless of their size. In contrast, they tend to avoid lower-than-average volume of stocks as it signals a lack of demand. 


  • What is the meaning of relative volume?

The relative volume is used by traders to compare the current trading volume with the ‘normal’ volume. For example, a relative volume of 4 means that a stock is trading at four times the average volume of stock. 


A surge in relative volume indicates a possible increase in share price, while any change in this number shows inflow or outflow of money for a stock. 


  • Why is the average volume of stocks important for traders?

Traders usually compare the current trading volume of a stock to its average 10-day volume. To get the 10-day average, you need to plot the moving averages on the volume bars. 

High-volume shares have a current volume higher than their 10-day average.

The moving average (MA) is a technical analysis tool that constantly updates the average price over a certain period. It helps to smoothen the price data by eliminating random short-term fluctuations. 


  • What is the difference between fundamental and technical analysis?

Fundamental analysis considers all the key factors that can potentially affect a company’s value for investors. These factors include economic factors, management process, financials, industry, etc. Long-term investors prefer fundamental analysis to estimate a stock’s intrinsic value. 


On the other hand, technical analysis involves forecasting the direction of a stock’s price movements using its historical performance. Using this process, analysts can give ‘buy’ or ‘sell’ signals depending on the stock price. It is mainly used to make short-term predictions of stocks. 


  •  What are the support and resistance levels of a share?

You can get specific buy and sell signals from the technical analysis of a stock called support and resistance levels, respectively. If the stock’s prices reach the lower limit (support level), an analyst can see a buying opportunity expecting a price surge. 


On the other hand, if the share prices reach the upper limit (resistance levels), an analyst can expect a fall in prices and send a ‘sell’ signal. It is important to note that analysts’ predictions can be wrong, and the share price can continue falling, leading to losses. 


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