Volumes holds high importance in Technical analysis as technical analysis is completely based on Price action and Volumes of the stock.
Before we learn about volumes let’s first understand some of the financial terms which define any stock’s price and volume.
Open – This is the price at which market or a particular stock opens. In other words we can say that open price is the price at which first trade of the day takes place. To analyse daily data, the Open price is of high relevance to all investors especially traders.
High – This is the highest price that stock touch during the day. In other words it can be said that it is the highest price at which buyers are willing to buy the stock on a particular day.
Low – This is the lowest price that the stock touch during the day. In other words it can be said that it is the lowest price at which sellers are willing to sell the stock on a particular day.
Close – The price at which stock closes at the end of market trading day is called Close price. In other words, we can say that it is the last price at which trade took place. Close price is of high relevance as it is mostly used in various charts for stock analysis.
Volume – The total number of shares (or contracts) traded on a particular trading day is called Volumes. Movement of stock in either direction with volumes holds high importance in stock analysis.
Open Interest – This is the total number of outstanding contracts which have not been exercised, closed, or expired of a future or option. Open interest is mostly used as an indicator in Futures and Options Segment.
Bid – This is the price a Buyer is willing to pay for a stock (i.e., the price you will receive if you sell).
Ask – This is the price a Seller is willing to accept (i.e., the price you will pay to buy the stock).
These above terms are used in every technical tools that study price relationships, trends, patterns, etc.
The total number of shares (or contracts) traded during a particular trading day or on different time frames like minute, hour, day, month, quarter, year etc. is called Volumes. In Technical Analysis, studying volume of the stock with price action holds high importance. Volume also provides important information about the intensity of price action of a stock.
For example : Let’s look at volume Data taken from NSE website for stock SBI, the volume of the stock is 1,53,41,756 Shares which means 1,53,41,756 shares has been traded on the exchange that is 1,53,41,756 shares has exchanged hands between buyers and sellers.
Note : A volume of 1,53,41,756 share means Buyers have bought 1,53,41,756 shares from the Sellers who have sold 1,53,41,756 shares to the Buyers.
Please don’t be mistaken for total volume as 1,53,41,756 (Buyers) + 1,53,41,756 (Sellers) = 3,06,83,512 Shares which is wrong. The shares which have exchanged hands between buyers and sellers only contribute to Volumes and thus total volume is only 1,53,41,756 shares.
Interpretation of Volumes :
Low volume levels are more common when a Stock price is going through a consolidation phase. Low volume happens when a stock move sideways in a particular trading range.
Low volume also often occurs when a stock is very close to bottoming out or is near the bottom.
High volume levels are often seen when a stock is in uptrend and is regularly making higher tops indicating this up move will last for some more time. High volumes also indicates price breakout or a reversal which marks the beginning of new trend.
Volume determines the intensity and accuracy of an existing trend :
- When a stock is in uptrend the volumes should be very high during the up move and during down move the volumes should we low then only it can be said with conviction that the stock is in Uptrend
- When a stock is in downtrend the volumes should be very high during the down move and during up move the volumes should we low then only it can be said with conviction that the stock is in downtrend.
Let’s take a look at Charts of Yes Bank Stock and understand how stock prices react as an effect of Volumes.
From above chart we can conclude that :
|S No.||Price||Volume||Stock Movement|
|1||Increases||Increases||Stock moves higher, large number of buyers|
|2||Increases||Decreases||Sideways/Up movement, small no. of buyers|
|3||Decreases||Increases||Stock moves Lower, large number of Sellers|
|4||Decreases||Decreases||Sideways/Down movement, small no. of Sellers|
In Next chapter we will learn about Moving Averages which is of highest importance when we choose a stock for investment.