What is Trading Volume
Volume indicates the number of shares traded within a particular time frame. How many shares of a company are traded in a particular time frame in a Stock Exchange is the trading volume of that stock in that time frame.
For example – If 10 lakh shares of a company are traded in a day that means a total of 10 lakh shares have been sold by sellers and equal numbers of shares have been bought by the buyers, hence the trading volume of that stock for that day is 10 lakh.
Importance of volume in trading
Volume is an important factor for analyzing the price action as it indicates the amount of trade. A higher amount of trade indicates the sentiment is strong and a lower amount of trade indicates the sentiment is weak. But only the volume will not tell you whether the complete sentiment, either is bullish or bearish. To calculate this you have to analyze the price candle along with the volume.
For example – If the price is falling and trading volume is higher or increasing then it shows more people are trying to sell that stock or some big investors are exiting, the selling pressure is higher and strong hence the price may fall more. On the opposite when the price is falling but volume is low or decreasing, this indicates that not much more people are interested to sell that stock; only a few small hands are selling in panic, hence the price fall may not continue much more and the trend will reverse very soon. Similarly in a rising trend if the volume is higher or increasing then the trend may continue further and if the volume is low or falling then it indicates that the trend may reverse at any time.
Trading Volume Indicator
Trading Volume is indicated by a separate volume chart along with the price chart like an indicator or you can add an underlying Volume chart below the price chart. Generally, Volume charts are used with candlestick charts. It looks like a histogram and each bar of the histogram shows trading volume for the same period that each candle in the candlestick chart shows. For Example – if you are using a 1day candle chart then each bar of the volume chart will show a trading volume of one day.
The color of the volume bar indicates a rise or fall in price than its previous close. If the price has fallen than its previous closing (previous candle’s closing price) then the volume bar will be red and if the price is above its previous close then the volume bar will be green. The red volume bar does not indicate sellers are more neither the green volume bar indicate buyers are more because the number of buyers and sellers will always be the same when someone buying someone is selling, otherwise the trade will not complete.
To calculate the rise and fall in volume, traders often use moving averages in the volume chart. If the volume is higher than its moving average then it indicates an increase in volume and if it is lower than its moving average then it indicates volume is falling. Traders also use other different indicators in the volume chart as per their requirements. Before adding moving average or any other indicator in the volume, you must add a separate volume chart, because in the underlying volume chart you cannot add any indicator.
How to add volume chart
Go to studies (of Fx. In mobile phones) – search for ‘Volume’ – a lot of options will be shown – select ‘Volume underlay’ if you want to add volume chart below the price candles – or select ‘Volume chart’ if you need a separate volume chart indicator.
How to add Moving Average in volume chart
Go to studies (of Fx. In mobile phones) – search for ‘Moving Average’- Click on ‘Moving Average’ –
in the Moving Average dialog box change the ‘Field’ to ‘Volume’ –
Select the period and Color as you required –
Click OK and a Moving Average line will be shown on the Volume chart.
Conclusion
Trading volume is an important component for the technical analysis of any stock. Without analyzing the volume trend you cannot make complete analysis to predict the future movement of any stock. The volume also plays a major role in stock analysis for Intraday Trading as well as in Positional Trading. And various technical indicators use trading volume in the formula for calculation like VWAP (Volume Weighted Average Price), OBV (On-Balance-Volume), etc.
This is a short and simple description of trading volume for basic knowledge & information of the beginners in the stock markets. If you need detailed pro knowledge then you can follow some good technical analysis books or may search the topic in Google for more detailed articles like in Wikipedia or in Investopedia.
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