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Trading volume plays a vital role in technical analysis because it is the ultimate confirming indicator for trends and chart patterns. Volume also gives a clearer view of crowd behaviour in the stock market.
What is trading volume?
Trading volume measures the number of securities (shares) bought and sold – matched – over a given period. For example, you decide to buy 100 HPG shares at VND 60,000, and at the same time I decide to sell 100 HPG shares at VND 60,000. When the price and quantity match on both sides, the trade is executed, and 100 shares is the volume of HPG’s most recent trade.
Where is a stock’s trading volume shown?
On the price board, trading volume is shown as the volume of the most recent matched order (Vol) and the total volume accumulated during the session (Total Vol).
On a price chart, volume is shown by the height of the vertical bars beneath each price candle. You can find sources of price charts here.
What does trading volume mean?
Every trade between a buyer and a seller adds to the total volume of that security. Trading volume carries several meanings:
Volume shows liquidity and investor demand in the market
Volume tells investors about the level of interest in, and the liquidity of, a particular security and the market as a whole. High trading volume means the stock is more liquid and attracts more investor interest.
Volume confirms the price trend
Stocks also trade according to the law of supply and demand. So over a given period, investors can use a stock’s trading volume to help identify its price trend. Specifically:
- Volume rising in step with the primary trend confirms the strength of the current trend, reinforced by the consensus of the crowd.
- Volume falling against the primary trend warns of a reversal, as investors start abandoning their positions and volume dries up.
Let’s study this in more detail.
How do you analyse trading volume?
The simplest way to analyse trading volume is to look at how it relates to the current price trend. Rising volume in an uptrend shows consensus among buyers, which helps reinforce the price trend. On the other hand, an uptrend with low or falling volume shows weakness among the “bulls” and warns that a correction may be coming. The same applies to downtrends.
You can easily see whether volume is rising or falling by looking at a moving average (MA) of volume.
In the chart above, you can clearly see price and trading volume rising together, as shown by the MA20 (white line). One more small point: sessions where volume jumps well above the average are often the ones that confirm important buy/sell signals.
Another equally popular volume indicator is OBV (On Balance Volume). It is a cumulative indicator, calculated by adding the volume of up sessions (green candles) and subtracting the volume of down sessions (red candles), to measure more precisely whether volume is trending with or against price.
Price and OBV moving in step also confirms the reliability of the current trend.
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Happy trading !
