Insights from Volume

Apurva Sheth
A few days back I spoke to you about volume which is one of the most important factor after price. Volume is nothing but the number of shares of a security that trade hands over a set period of time. For every stock bought there is someone else who has sold it and it is the interaction/exchange between these two groups that creates volume. One cannot happen without the other.

Last time I told you how I used volume to improve and refine my trading process. I set a rule that I would be recommending only those stocks whose average traded volumes of last 14 days as on the date prior to making recommendation is more than Rs 4 crore.

By doing this we have ensured that we trade only in those stocks which are fairly liquid have enough depth and will give us opportunity for timely entry and exit. Apart from all the benefits I just mentioned volume also gives us wonderful insights about the trend and its likely direction going ahead.

So let's look at how volume can help us improve our analysis.

  1. Volume 'Confirming' the Trend

    Volume is used as a tool to confirm the ongoing trend. Rising volumes and rising prices are normal. This combination indicates that the market is in gear and confirms the uptrend. Rising volumes along with rising price suggest that more and more buyers are willing to pay higher price for the stock. This suggest that demand is exceeding supply which is good enough reason for prices to move higher. Thus such a combination 'confirms' the uptrend. This is very essential criteria for a stock to continue moving higher.

    Rising Prices and Rising Volumes
    Source: Profit Hunter

    Falling Prices and rising volumes are considered as normal however this is much stronger signal than rising volumes and rising prices. Nonetheless, rising volumes along with falling prices suggests that the downtrend is likely to continue as demand is still overwhelmed by supply. Another caveat here is that rising volumes is not a necessity for the prices to fall. Lack of demand itself can also lead to a fall in prices.

    Falling Prices and Rising Volumes
    Source: Profit Hunter

  2. Volume 'Diverging' with Price

    Now this is where volume analysis becomes interesting, when volume diverges with the price. In the picture I have illustrated below you can see that the price is rising but the volume isn't. This is what is called as divergence. This suggests that with each advance in price the enthusiasm amongst buyers is decreasing. They are not participating at higher levels which acts as a warning signal. Drying up of buying is normally a precursor to a fall, thus one should remain watchful of the volumes at every successive peak.

    Rising Prices and Falling Volumes
    Source: Profit Hunter

    In the above example drying volumes gave us a warning that an uptrend may reverse. Similarly drying volumes in a downtrend gives us an early indication that the downtrend may atleast come to a halt if not reverse immediately. Let's have a look at the picture that I have illustrated below. Here you can see that the price is in a downtrend and along with it the volumes are falling. This suggests that with every fall the selling pressure is reducing which means that majority of the weaker hands have exited from the stock and the downtrend is likely to come to a halt if not immediately reverse. Sometimes the stock may consolidate in a range for some time and move higher later on. Probably a short covering rally can also be possible. Stocks can bounce back to as high as about 20-25% simply on the back of short covering rallies before they resume their downtrend.

    Falling Prices and Falling Volumes
    Source: Profit Hunter

    We have just begun analysis through volumes as we proceed further I will show you more ways in which we can interpret volumes along with examples.
How do you analyse a stocks volume before trading or investing? Share your views in the Club or share your comments here.

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16 Responses to "Insights from Volume"
rajesh c p
21 Sep, 2016
That is simple and excellent. I would like to participate in the futures and options market.Like 
Chirag Gandani
30 Mar, 2015
Hi, I am new to the trading market. I liked the post although I would like to know how we can come to know about the Demand,Supply and Volume prior of buying stocks. Making it more simpler can any one indicate what's the main source from where we can refer weather to buy the stocks at that particular time or not. As this is my debut I just follow one strategy that when the market is in red i.e.e downfall I buy shares of blue chip companies. Am I on the right path as a debut? Please correct me If I am making any mistakes in identifying the correct buy time Like 
Lobo George
29 Mar, 2015
No complications, very simple to understand, kindly keep writing on Volume on Spread, please inform when teach more on volumesLike 
Umakant Pandya
29 Mar, 2015
After few formation of either Highs or Lows only any one can come to know, meanwhile entry from Top or Bottom any one can miss. Do you agree? It is easy to explain or claim the expertise, after formation of chart but not before of formation chart? Like (1)
chandan nahata
29 Mar, 2015
i fully agree with this analysis.it is simple,reliable,as well as practical.Like 
J Singh
29 Mar, 2015
very informative and explained in simple languageLike 
SATISH
27 Mar, 2015
Thanks for simplifying the concept to understand. But I want to know which time frame we should see price and volume bars?Like 
Susmita
24 Mar, 2015
Simple fluid language could grasp in one reading, recommended for students of FinanceLike 
Udit Bhaskar Roy
23 Mar, 2015
Lucid simple effectiveLike 
Sanjeev
22 Mar, 2015
Sincere thanks for providing me another insight into price & volume.Like (1)
kjsarma
22 Mar, 2015
Very useful n layman can understand. TQ...Like (3)
Hasmukh Sitapara
21 Mar, 2015
i like the column profit Hunter,too much, and came to know the very good idea to purchase or making profit considering the volume and price reflaction. Thank u so much.Like 
RAMESH GAUTAM
21 Mar, 2015
An excellent volume & price analysis . Even a layman can assimilate the analysis . Keep it up.Like (1)
naeem
21 Mar, 2015
where do we get this data to analyseLike 
Bhadresh Shah
21 Mar, 2015
It is interesting. Please explain the same with Auro Pharma where in Volume and Open Interest dried up in last two quarters with Price drifting between 1087 and 1278 with Sharp decline towards 980 and then bounce back to 1287 in 14 trading days and a sharp fall to 1160 in last two trading sessions. Regards, Bhadresh shah Prop Desk Trader (Directional) Hexagon CapitalLike (1)
Sandip Varia
21 Mar, 2015
excellent. I am convinced with your analysis of falling market & falling volumes.Like 
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