Introduction
A financial transaction involving an exchange of goods results from a mutual agreement between buyer and seller. When referring to securities like stocks, an amount of goods exchanged between these two parties is called a volume. On a chart, the volume is often represented by green and red bars below the graph of a particular security. Information about the volume can give an analyst a better sense of market sentiment and help with the timing of trades.
Volume and liquidity
The amount of liquidity in a market translates to the ability to buy or sell a security. Money market instruments and marketable securities are considered to be liquid assets. However, market conditions do not always allow for enough liquidity, which is reflected in the volume. Sometimes, low liquidity may result in volatile price action, trend reversals, market gaps, etc. Generally, securities with high daily volume are more liquid than securities with low daily volume. Market holidays and shortened trading sessions have a tendency to be accompanied by low daily volume.
Illustration 1.01
The picture above shows Histogen Inc. on a daily time frame. Penny, micro-cap, and nano-cap stocks, which trade over-the-counter, are notorious for their low daily volumes.
The price-volume relationship
Analyzing the price-volume trend can reveal additional clues for the successful execution of a trade. Usually, an asset's simultaneous increase in volume and price is considered positive. Additionally, it often confirms a bullish thesis. However, a decrease in volume accompanying an ongoing rise in the price may give a technical analyst a hint that fewer buyers are willing to buy an asset. Therefore, a technical analyst should treat the decrease in volume and increase in price with some skepticism and pay close attention to it. The same rule applies when volume increases and price decreases simultaneously. Some analysts like to differentiate between significant and insignificant moves depending on the volume size. Price moves that occur on low volume tend to be considered less important than those on high volume. Typically, volume tends to increase as a trend develops. In an uptrend, a security tends to top when buyers are no longer willing to pay the asking price and start leaving a market. In a downtrend, a bottom tends to form when sellers lessen their selling pressure; or a substantial portion of new buyers enter a market. In some instances, quick and sharp growth in volume can signal the beginning of a new trend; or it may imply new traders have entered the market.
Illustration 1.02
The illustration shows the Covid 19 crash in 2020. Volume can be seen increasing in the early stage of the crash; it is accompanied by a fast and sharp drop in price. Eventually, volume can be seen decreasing towards pre-pandemic levels, reflecting weakening selling pressure.
Reporting
Each market exchange tracks and reports its volume data for a particular security. Volume is regularly updated throughout the trading session. However, the figure is only estimated as final figures are reported on the following day.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not serve as a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
A financial transaction involving an exchange of goods results from a mutual agreement between buyer and seller. When referring to securities like stocks, an amount of goods exchanged between these two parties is called a volume. On a chart, the volume is often represented by green and red bars below the graph of a particular security. Information about the volume can give an analyst a better sense of market sentiment and help with the timing of trades.
Volume and liquidity
The amount of liquidity in a market translates to the ability to buy or sell a security. Money market instruments and marketable securities are considered to be liquid assets. However, market conditions do not always allow for enough liquidity, which is reflected in the volume. Sometimes, low liquidity may result in volatile price action, trend reversals, market gaps, etc. Generally, securities with high daily volume are more liquid than securities with low daily volume. Market holidays and shortened trading sessions have a tendency to be accompanied by low daily volume.
Illustration 1.01
The price-volume relationship
Analyzing the price-volume trend can reveal additional clues for the successful execution of a trade. Usually, an asset's simultaneous increase in volume and price is considered positive. Additionally, it often confirms a bullish thesis. However, a decrease in volume accompanying an ongoing rise in the price may give a technical analyst a hint that fewer buyers are willing to buy an asset. Therefore, a technical analyst should treat the decrease in volume and increase in price with some skepticism and pay close attention to it. The same rule applies when volume increases and price decreases simultaneously. Some analysts like to differentiate between significant and insignificant moves depending on the volume size. Price moves that occur on low volume tend to be considered less important than those on high volume. Typically, volume tends to increase as a trend develops. In an uptrend, a security tends to top when buyers are no longer willing to pay the asking price and start leaving a market. In a downtrend, a bottom tends to form when sellers lessen their selling pressure; or a substantial portion of new buyers enter a market. In some instances, quick and sharp growth in volume can signal the beginning of a new trend; or it may imply new traders have entered the market.
Illustration 1.02
Reporting
Each market exchange tracks and reports its volume data for a particular security. Volume is regularly updated throughout the trading session. However, the figure is only estimated as final figures are reported on the following day.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not serve as a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
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