Basically, it refers to the number of shares traded at the market during trading hours. It is also a measure of how much a particular security has been traded within a specific period of time. As a powerful tool, it’s used as an indicator when it comes to trading.
In day trading, there are buyers and sellers which mean buyers will purchase shares sold by the sellers. As a result, movement will be created at different time frames. This happens when long term technical and fundamental factors are present.
Significance of Volume
Volume helps to disclose the level of interest in a security. It is common for day traders to check current and relative prior volumes as these indicators help to show if the interest in a particular security is high or low.
Compared to prior volume, relatively high volume has been found to be more suitable for traders. When it comes to low volume, this indicates a lack of interest and little price movement.
The reason behind this is that day traders need to implement their entry and exit strategies quickly and with ease. For this to be successful, one needs to trade stocks with high daily volume – minimum of 1 million.
For swing traders, a lower volume is more attractive – around 100,000 to 500,000 shares within a day.
How to use volume to improve trading
In order to analyze volume and ensure successful trading, there are a few terms you need to familiarize yourself with. They include:
a. High volume up – this translates to more trading is currently in play at the ask which means buyers are aggressive and as a result, it helps to identify trend changes, continuations and turns.
b. High volume down-This simply means that more trades are being made and sellers are aggressive.
c. Low volume – simply means that the quantity available is lower than the average daily quantity
d. Confused volume – in day trading, it refers to an algorithm which helps to identify places where ask, bid and downside are happening. Confused volume is an important indicator which helps to show changes occurring to trends.
e. Normal volume – in this situation, the quantity of shares or trades is at an equilibrium so traders don’t have any advantage or edge
In technical analysis, volume is an important indicator that aids traders in confirming trends and chart patterns. It is a common practice among traders to spend time monitoring bar charts and in particular, price movement.
When price movement moves up or down with relatively high volume, then this situation is viewed as strong. This means that if you are monitoring a large price movement, it is wise to check on volume and monitor to see it has the same changes.
Volume is also used to confirm chart patterns for example triangles, flags, head and shoulders. Among these patterns, there are focal points that hold important information vital to day traders. This simply means that if volume is not present to help identify the patterns as well as the focal points, the signal generated will be weak.
Lastly, price is known to precede volume and if closely monitored, it helps one form ideas regarding trend reversals. Case in point – if there is a decrease in the uptrend, this helps to show that the uptrend is about to end.
Volume is an important measure that can be used to identify as well as assess market strength and weakness.
Together with various indicators, it allows day traders to come up with sound entry and exit strategies by looking at price action with the primary goal of capitalizing on trends.
Learning how to identify volume trends is exciting especially if you are patient and devoted to be a full time trader. With practice, it can give a trader or investor a huge advantage.