July 21, 2009
Trading Volume
The trading volume reflects the strength of a stock, commodity, or index and it provides an indication to investors of the quality of a price trend and the liquidity of a security or commodity. Volume itself is the number of shares of stock, options, bonds, or futures contracts that are traded over a specific period of time. Additionally we refer to advancing and declining volume. Advancing volume is the total volume for all stocks that are increasing in price whereas declining volume is the total for all stocks that are decreasing in price.
When analyzing volume and what it means in relation to the market's strength we should note the following:
- High volume indicates an active market where the spread between the bid and ask prices are typically narrower.
- More reliance can be placed on the movements in stock price during periods of high volume than during periods of low volume. This is because heavy volume is the virtual consensus of a high number of participants in the stock market.
- Characteristics of high volume include a breakout in a trading range, indicating the initial stage of a new trend, as well as panic selling.
- You will also see high trading volume when strong buyer interest exists forming a market top.
- Investors will experience low volume during unsettling periods in the stock market, such as market bottoms.
- Low volume reflects a lack of confidence which typically means there is a consolidation period where prices are in a sideways trading range.
- Volume can tell stock investors how strong changes in expectations really are.
- A substantial increase in volume can point to a climax or breakout of a move which can be final or temporary.
When analyzing volume changes you are dealing with price trends and patterns. It is considered a good time to buy stock when there price and volume both increase. Investors should also evaluate trading volume as it relates to appraising market strength or weakness. If the volume is decreasing then the current trend will most likely not continue and a reversal may be coming soon. On the other hand, when volume is increasing, it is likely that prices will continue on their current trend. This should happen whether or not prices are going up or down.
Investors should study volume trading as well in order to see how it can be used to analyze the markets. These are areas that every investor should learn about in order to have success trading stocks.
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