The Concept of Trading Volume (volume) in Stocks
Trading volume (volume) is one of two critical factors that constitute the chart of each stock. Trading volume is the total number of shares matched during that day's session for a stock code or exchange.
Trading volume differs from outstanding shares. Outstanding shares refer to the number of shares listed for trading on the market, whereas trading volume represents the demand to buy and sell from investors. And volume can be either smaller or larger than the listed share volume.
The Significance of Volume in Stocks
- Represents the trading demand of investors
Through trading volume, investors can analyze the current demand for a stock over a period or after any trading session. A stock with a high buying volume indicates strong market interest and an expectation for a price increase. Conversely, a rapid increase in selling volume often means that investors are likely to be liquidating the stock for some reason, such as a drop in stock points or some negative news from within the company.
- Determines the price trend of the stock
Based on trading volume, investors can determine the current price trend of the stock through supply and demand rules. If supply is lower than demand, the price rises, and vice versa; if supply is higher than demand, the stock price tends to decrease. If the market-to-sell increases, the trading volume of sales increases, while if the buying demand decreases, the stock will drop to liquidate quickly. Therefore, one can visualize the price trend through volume with little analysis.
- Indicates the future potential of the stock
Through trading volume over a certain period, investors can quickly price a stock. When the buying volume increases, it means the stock is valued highly as investors anticipate its price increase based on the information they obtain from news or provided by the company. Conversely, when the selling volume increases, the stock is undervalued as investors fear that it might lose its value. However, pricing the potential of a stock through trading volume is challenging because volume only represents the shares matched during the session, meaning every stock continuously has low or high trading volume. At some point, investors will stop buying or selling, creating sudden lows or highs in stock prices.
How to Effectively Use Volume Indicators?
- Price candle increases/decreases with an extensive range and high trading volume.
Even if investors identify a large active buying volume in a session, they should still observe for some time to determine the upcoming correct trend. Although this might reduce profits, it significantly increases safety. Conversely, when the active selling volume is greater than the buying, investors might consider whether the stock price has reached a short-term support level before making a decision to sell some stocks and wait for another appropriate buying point.
- Price candle increases/decreases with an extensive range and low trading volume.
Investors should refrain from making too hasty decisions when the price increases or decreases significantly, combined with quick volume. This indicates a need for more consensus among many investors about the price increase. Therefore, the stock price may not sustainably increase, but only for 1-2 sessions, and when the price decreases significantly with low volume, it doesn't signify anything. However, investors should carefully check if it cuts through the support line and the average volume of the last 20 sessions to make a more accurate decision.
- The price candle increases/decreases with a small range but closes near the opening price and high trading volume.
A price candle fluctuating within a small range indicates a tug-of-war between buyers and sellers. Sellers do not accept selling at a lower price; buyers also consider the most reasonable price possible. Investors should analyze whether the cost base is genuinely appropriate and whether it has reached the expected profit level to take profits potentially.
- Price candle increases/decreases with a small range and low trading volume.
When the price fluctuates within a narrow range, and trading volume is low, investors might not need to pay much attention, as matching at low volume in a price tug-of-war state does not signal much about short-term stock buying or selling. This signifies the dullness of a stock, an industry group, or the entire market. In such cases, investors need to observe a few more sessions or might switch to another stock group if it is a common phenomenon in an industry group. If it is a general picture of the entire market, investors should analyze upcoming macroeconomic information and predict which industry groups will benefit.
Conclusion:
Once investors fully understand the concept and how to use volume indicators in stocks, they can apply this to observe the stock market, capture phenomena, and thus devise the most effective investment strategy.
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