Volume Analysis For Stocks Market

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Importance of Volume in Technical Analysis

Volume Analysis For Stocks Market : “Price is the king but volume is the key”. Volumes lead prices. If prices start moving up on high volumes, there is a very good chance that this rise will be sustained. However, it is very important to understand where the volumes have occurred and where the price movement has taken place along with the volumes.

A table for Volume Analysis For Stocks Market given below :

PriceVolumeEffect
Rising PriceRising VolumeStrongly bullish momentum
Rising PriceFalling VolumeUnreliable or even bearish
Falling PriceRising VolumeStrongly bearish momentum
Falling PriceFalling VolumeUnreliable or even bullish

Though the above is true and applicable in normal situations, there are some exceptions. For instance, at extreme points, i.e. at times when prices have moved up sharply, and at lows when the prices have fallen sharply, this logic may not work.

Volume Analysis For Stocks Market

Volume is that the one amongest the foremost necessary parameters utilized in Technical Analysis. Volume provides info of what percentage shares modified hands and at what value in an exceedingly stock over a given time-frame, giving a sign of interest within the stock.

Since every stock is totally different, and contains a totally different variety of outstanding shares, volume should be compared to the historical volume of the stock in thought to identify changes in volume trend. Volume is additionally wont to make sure value trends, breakouts, and spot potential reversals.

Using Volume Analysis to research Stock value Movements

Monitoring volume at the same time will aid in analyzing stock value movements. There area unit 3 primary ways that volume is formed use of in conjunction with value analysis: Confirming Trends, recognizing Potential value Reversals, and Confirming value Breakouts.

Confirming Trends

Increasing volume shows conviction of patrons and sellers in either pushing the worth up or down severally. for instance, if the trend is up and volume will increase because the value moves higher, it shows shopping for interest and this is often usually related to larger moves to the top going forward.

In the on top of chart, banking concern of Asian country represents the on top of mentioned analysis because the volume step by step will increase because the worth surges higher. If you’ve got taken a optimistic position, the rising volume helps to verify the uptrend. If you’re short, the rising volume on the value rise tells you the value may still trend higher and it’s going to be time to exit your short position.

A trend will persist on declining volume for long periods of your time, however generally declining volume with an increase in costs indicates that the trend is weakening. as an example, if the trend is up however the volumes ar steady declining, it shows that there ar solely few traders United Nations agency ar driving the stock resulting in an increase in worth while not broader participation. Any larger marketing pressure may lead to a reversal within the uptrend resulting in a pointy correction within the stock.

Volume ought to ideally be larger once the value is occupancy the trending direction, and lower once moving against the trend (pullbacks). This shows the movement within the trend direction is robust and therefore the pullbacks ar weak, creating the trend a lot of probably to continue.

Spotting worth Reversal
For a bargainer to identify worth reversal, distinguishing exhaustion move is vital. Exhaustion move is outlined as a situation whereby a specific stock moves higher with lower volumes and reaches its peak of its extended rally with most volumes i.e. 5x-10x of its average daily volume. this might probably indicate the tip of current trend.

Example 1: In the chart above of Repco Home Finance, we can observe a classic example of an exhaustion move, price hits an all time high with a huge spike in volumes, buyers get exhausted and with few buyers left to push the price higher, we see a reversal in the trend of the stock in the following days.

Example 2: In the chart below of Bharat Petroleum, we witness a sharp decline in price along with a significant rise in volumes as the stock price hits its multi-week low, indicating an exhaustion of sellers as majority of the ones who wanted to exit have exited this stock. And with few sellers left to push the prices downwards, buyers took the upper hand stock leading to recovery in prices.

Confirming price breakouts

In a scenario, a particular stock has strong Support or Resistance levels, volumes can help to confirm a breakout. If the price has struggled to get above a certain resistance point, a conviction of buyers can be witnessed if the breakout is supported with larger volumes. Such breakout is likely to be legitimate.

In the above example of CESC Ltd, we witness a breakout from the sideways consolidation pattern on the daily chart backed by a steep surge in volumes. As the volumes increased with price breaching above Resistance level, a possible bullish breakout can be expected.

A break above Resistance, or below Support, on lower volumes shows little conviction of the trade leading to the failure of the breakout. A common problem in Technical Analysis is buying an upside breakout, or selling a downside breakout, when volume doesn’t confirm it.

The chart above of Titan represents a false breakout. Assume that you had bought near the top of this range at Rs 542 expecting the price to move to Rs 560 levels, which is the target derived from a rectangle chart pattern breakout with a stop loss of Rs 525. In such a case, your bullish trade would have resulted into a huge loss as the stop loss price of Rs 525 got triggered since the breakout was not backed by strong volumes which provided a false signal, leading to a drop in price.

Confirming price pattern breakout

Price pattern breakout is similar to price breakout depending on volumes for confirmation.

In the above example of Ashok Leyland, we witness a cup and handle breakout backed by a rise in volumes which give an added confirmation to the trader. The stock has managed to hit its target price of Rs 110 which is derived from the cup and handle formation.

Key Takeaways

  • Volume is used as a secondary indicator.
  • Volume gives an indication of interest in a stock.
  • Volume is also used to confirm price trends, breakouts, and spot potential reversals.

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