Pathshala: Volume Study

<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="separator" style="clear: both; text-align: center;">
</div>
<div style="text-align: center;">
<b><span style="font-family: "arial" , "helvetica" , sans-serif;">Definition of  <span style="font-family: "arial" , "helvetica" , sans-serif;"></span>Volume Analysis</span></b></div>
<div id="topsummary">
<div style="text-align: justify;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg41Cmo_JpdIUqVyUW6H2R-b4uVgLNpd6y3Gtv24oq5Z-WRSXVzLzuJsC0wsoBTfYdiCI9JkisBlt1ufnPe1QVwbo-esjysNa6EqB13lB_2NrFFD3JYLCTg7ZNxu56_j7kIKRCuGquWlo0/s1600/red-green-2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="267" data-original-width="531" height="100" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg41Cmo_JpdIUqVyUW6H2R-b4uVgLNpd6y3Gtv24oq5Z-WRSXVzLzuJsC0wsoBTfYdiCI9JkisBlt1ufnPe1QVwbo-esjysNa6EqB13lB_2NrFFD3JYLCTg7ZNxu56_j7kIKRCuGquWlo0/s200/red-green-2.png" width="200" /></a><span style="font-family: "arial" , "helvetica" , sans-serif;">The examination of the number of shares or contracts of a security 
that have been traded in a given time period. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume analysis is used by
 technical analysts as one of many factors that inform their trading 
decisions. By analyzing trends in volume in conjunction with price 
movements, investors can determine the significance of changes in a 
security's price. </span><br />
<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume typically increases as price increases and vice
 versa; when the opposite occurs, it's called divergence.

</span></div>
<div style="background-color: white; border: medium none; color: black; overflow: hidden; text-align: left; text-decoration: none;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><br /></span></div>
</div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume is one of the most important technical analysis tools to learn and 
understand how to apply to price movements. Volume increases every time a buyer 
and seller transact their stock or futures contract. If a buyer buys one share 
of stock from a seller, then that one share is added to the total volume of that 
particular stock. Volume has two major premises:</span></div>
<div style="text-align: justify;">
</div>
<ol style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">When prices rise or fall, an increase in volume is strong confirmation that 
        the rise or fall in price is real and that the price movement had strength. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">When prices rise or fall and there is a decrease in volume, then this is 
        interpreted as being a weak price move, because the price move had very little 
        strength and interest from traders. </span></li>
</ol>
<span style="font-family: Arial,Helvetica,sans-serif;"><span style="font-family: "arial" , "helvetica" , sans-serif;"> </span>Volumes indicate how many shares are bought and sold over a given period
 of time. The more active the share, higher would be its volume. For 
example, you decide to buy 100 shares of Amara Raja Batteries at 485, 
and I decide to sell 100 shares of Amara Raja Batteries at 485. There is
 a price and quantity match, which results in a trade. You and I 
together have created a volume of 100 shares. Many people tend to assume
 volume count as 200 (100 buy + 100 sell) which is not the right way to 
look at volumes.</span><br />
<br />
<span style="font-family: Arial,Helvetica,sans-serif;">The following fictional example should help you understand how volumes add up on a typical trading day:</span><br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTshjYSkTzm0UBEcPGmGP7mHoVK2OTrJaS4FkJDIuD7YCJXGptr5EZWeyGipfVjWF1vcl5r40Oq81mz8IaEhKlAWDl8aCd4cLF9vr6jT7soz7zKxPqRXQzsDnOTmIAQS9UU2Z3J22WeXc/s1600/screenshot.2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="232" data-original-width="606" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgTshjYSkTzm0UBEcPGmGP7mHoVK2OTrJaS4FkJDIuD7YCJXGptr5EZWeyGipfVjWF1vcl5r40Oq81mz8IaEhKlAWDl8aCd4cLF9vr6jT7soz7zKxPqRXQzsDnOTmIAQS9UU2Z3J22WeXc/s1600/screenshot.2.jpg" /></a></div>
<br />
<span style="font-family: Arial,Helvetica,sans-serif;">At 9:30 AM there were 400 shares exchanged at the price of 62.20. An 
hour later, 500 shares were traded at 62.75. So at 10:30 AM if you were 
to check the total volume for the day, it would be 900 (400 + 500). 
Likewise 350 shares at 63.10 were traded at 11:30 AM, and upto 11:30 AM,
 the volume was 1,250 (400+500+350). So on, and so forth.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Here is a screen shot from the live market highlighting the volumes 
for some of the shares. The screen shot was taken around 2:55 PM on 5<sup>th</sup> of August 2014.</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguqNieV8lBHSa-SjrB2lybITrJ2CCkKqZLVlD_6_fmi5LlpTIG3AZ6naD8By4OebqWV4W3fMjWYzI17NsGvgdLs3pePIf3ZgC5WzII2vB5RSRqSiYojSpTPWCnJ4aFlMfg4wc7SqAqLMA/s1600/M2-Ch12-chart1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="220" data-original-width="639" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEguqNieV8lBHSa-SjrB2lybITrJ2CCkKqZLVlD_6_fmi5LlpTIG3AZ6naD8By4OebqWV4W3fMjWYzI17NsGvgdLs3pePIf3ZgC5WzII2vB5RSRqSiYojSpTPWCnJ4aFlMfg4wc7SqAqLMA/s1600/M2-Ch12-chart1.jpg" /></a></div>
<br />
<span style="font-family: Arial,Helvetica,sans-serif;">If you notice, the volume on Cummins India Limited is 12,72,737 
shares, likewise the volume on Naukri (Info Edge India Limited) is 
85,427 shares.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">The volume information that you see here is the cumulative volume. 
Meaning, at 2:55 PM, a total of 12,72,737 shares of Cummins were traded 
at various price points ranging from 634.90 (low) and 689.85 (high).</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">With 35 minutes left for the markets to close, it is only logical to 
expect the volumes to increase (of course assuming traders continue to 
trade the stock for the rest of the day). In fact here is another screen
 shot taken at 3:30 PM for the same set of stocks with volume 
highlighted.</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<span style="font-family: Arial,Helvetica,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZDdikwxEklmtbi4cIrh45UBaBFSFPLxBJ4GYmJzFw7qTtzNiww6sKbaG7s7r_HcijKXSV9JmlWPaUsKiMt3PYrY7iWVGRRNRGTg6bjoN9L-m-jZGWLJrBaSLKuqmZ9gyP2_mKQSuOFCs/s1600/M2-Ch12-chart2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="239" data-original-width="639" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZDdikwxEklmtbi4cIrh45UBaBFSFPLxBJ4GYmJzFw7qTtzNiww6sKbaG7s7r_HcijKXSV9JmlWPaUsKiMt3PYrY7iWVGRRNRGTg6bjoN9L-m-jZGWLJrBaSLKuqmZ9gyP2_mKQSuOFCs/s1600/M2-Ch12-chart2.jpg" /></a></span></div>
<span style="font-family: Arial,Helvetica,sans-serif;">As you can see, the volume for Cummins India Limited has increased from 
12,72,737 to 13,49,736. Therefore, for Cummins India the volume for the 
day is 13,49,736 shares. The volume for Naukri has increased from 85,427
 to 86,712, making 86,712 shares as the volume for the day. It is 
important for you to note that the volumes shown here are cumulative.</span><br />
<h3 style="text-align: left;">
<span style="font-family: Arial,Helvetica,sans-serif;">The volume trend table</span></h3>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Volume information on its own is quite useless. For example, we know 
that the volumes on Cummins India is 13,49,736 shares. So how useful is 
this information when read in isolation? If you think about it, it has 
no merit and hence would actually mean nothing. However when you 
associate today’s volume information with the preceding price and volume
 trend, then volume information becomes lot more meaningful.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">In the table below you will find a summary of how to use volume information:</span><br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsfzC4PKOA72aENhxqaxBVBLE-JLidbPF7egpdFg_SRez1vGyCpOreoxl_oEV2MQBz2QHQgFsaA2FQxyfsqooXSsV-_f_wYtikoWJDgQvIm_ATicD4BLr5EhWLfiiuEji4pq0n1J5xKGk/s1600/screenshot.1.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="149" data-original-width="607" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsfzC4PKOA72aENhxqaxBVBLE-JLidbPF7egpdFg_SRez1vGyCpOreoxl_oEV2MQBz2QHQgFsaA2FQxyfsqooXSsV-_f_wYtikoWJDgQvIm_ATicD4BLr5EhWLfiiuEji4pq0n1J5xKGk/s1600/screenshot.1.jpg" /></a></div>
<span style="font-family: Arial,Helvetica,sans-serif;"><br /></span>
<span style="font-family: Arial,Helvetica,sans-serif;">The first line in the table above says, when the price increases along with an increase in volume, the expectation is bullish.</span><span style="font-family: Arial,Helvetica,sans-serif;">
</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">Before we understand the table above in detail, think about this – we
 are talking about an ‘increase in volume’. What does this actually 
mean? What is the reference point?  Should it be an increase over the 
previous day’s volume number or the previous week’s aggregate volume?</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">As a practice, traders usually compare today’s volume over the 
average of the last 10 days volume. Generally the rule of thumb is as 
follows:</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">High Volume = Today’s volume > last 10 days average volume<br />
Low Volume = Today’s volume < last 10 days average volume<br />
Average Volume = Today’s volume = last 10 days average volume</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">To get the last 10 day average, all you need to do is draw a moving 
average line on the volume bars and the job is done. Of course.</span><br />
<h3 style="text-align: left;">
<span style="font-family: Arial,Helvetica,sans-serif;">Thought process behind the volume trend table</span></h3>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">When institutional investors buy or sell they obviously do not 
transact in small chunks. For example, think about LIC of India, they 
are one of the biggest domestic institutional investors in India. If 
they would buy shares of Cummins India, would you think they would buy 
500 shares? Obviously not, they would probably buy 500,000 shares or 
even more. Now, if they were to buy 500,000 shares from the open market,
 it will start reflecting in volumes. Besides, because they are buying a
 large chunk of shares, the share price also tends to go up. Usually 
institutional money is referred to as the “smart money”. It is perceived
 that ‘smart money’ always makes wiser moves in the market compared to 
retail traders. Hence following the smart money seems like a wise idea.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">If both the price and the volume are increasing this only means one 
thing – a big player is showing interest in the stock. Going by the 
assumption that smart money always makes smart choices the expectation 
turns bullish and hence one should look at buying opportunity in the 
stock.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Or as a corollary, whenever you decide to buy, ensure that the 
volumes are substantial. This means that you are buying along with the 
smart money.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">This is exactly what the <strong>1st row</strong> in the volume trend table indicates – expectation turns bullish when both the price and volume increases.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">What do you think happens when the price increases but the volume decreases as indicated in the <strong>2<sup>nd</sup> row</strong>?</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Think about it on the following terms:</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><ol>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Why is the price increasing?
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Because market participants are buying</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Are there any institutional buyers associated with the price increase?
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Not likely</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">How would you know that there are no meaningful purchase by institutional investors
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Simple, if they were buying then the volumes would have increased and not decrease</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">So what does an increase in price, associated by decreasing volumes indicate?
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">It means the price is increasing because of a small retail 
participation and not really influential buying. Hence you need to be 
cautious as this could be a possible bull trap</span></li>
</ol>
</li>
</ol>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Going forward, the <strong>3rd row</strong> says, a decrease in price along with an increase in volume sets a bearish expectation. Why do you think so?</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">A decrease in price indicates that market participants are selling 
the stock. Increase in volumes indicates the presence of smart money. 
Both events occurring together (decrease in price + increase in volumes)
 should imply that smart money is selling stocks. Going by the 
assumption that the smart money always makes smart choices, the 
expectation is bearish and hence one should look at selling opportunity 
in the stock.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Or as a corollary, whenever you decide to sell, ensure that the 
volumes are good. This means that you too are selling, along with the 
smart money.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Moving forward, what do you think happens when both volume and price decrease as indicated in the <strong>4<sup>th</sup> row</strong>?</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Think about it in on following terms:</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><ol>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Why is the price decreasing?
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Because market participants are selling.</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Are there any institutional sellers associated with the price decrease?
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Not likely</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">How would you know that there are no meaningful sell orders by institutional investors
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Simple, if they were selling then the volume would increase and not decrease</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">So how would you infer a decline in price and a decline in volume?
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">It means the price is decreasing because of small retail 
participation, and not really influential (read as smart money) selling.
 Hence you need to be cautions as this could be a possible bear trap.</span></li>
</ol>
</li>
</ol>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><h3 style="text-align: left;">
<span style="font-family: Arial,Helvetica,sans-serif;">Revisiting the checklist</span></h3>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Let us revisit the checklist and revaluate from the volumes 
perspective. Imagine this hypothetical technical situation in a stock:</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><ol>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Occurrence of a bullish engulfing pattern – this suggests a long trade for reasons discussed previously</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">A support level around the low of bullish engulfing – support 
indicates demand. Therefore the occurrence of a bullish engulfing 
pattern near the support area suggests there is indeed a strong demand 
for the stock and hence the trader can look at buying the stock.
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">With a recognizable candlestick pattern and support near the stoploss, the trader gets a double confirmation to go long</span></li>
</ol>
</li>
</ol>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Now along with support near the low, imagine high volumes on the 2<sup>nd</sup> day of the bullish engulfing pattern i.e on P2 (blue candle). What can you infer from this?</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">The inference is quite clear – high volumes plus increase in price 
confirms to us that large influential market participants are 
positioning themselves to buy the stock.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">With all three independent variables i.e candlesticks, S&R, and 
volumes suggest to take the same action i.e to go long. If you realize 
this is a triple confirmation!</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">The point that I want to drive across is the fact that volumes are 
very powerful as it helps the trader in confirming a trade. For this 
reason it is an important factor and therefore must be included in the 
checklist.</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><span style="font-family: Arial,Helvetica,sans-serif;">Here is how the updated checklist now stands:</span><br />
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><ol>
<li><span style="font-family: Arial,Helvetica,sans-serif;">The stock should form a recognizable candlestick pattern</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">S&R should confirm the trade. The stoploss price should be around S&R
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">For a long trade, the low of the pattern should be around the support</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">For a short trade, the high of the pattern should be around the resistance</span></li>
</ol>
</li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Volumes should confirm to the trade
</span><ol type="a">
<li><span style="font-family: Arial,Helvetica,sans-serif;">Presence of above average volumes on both buy and sell day</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Low volumes are not encouraging and hence do feel free to hesitate taking a trade where the volumes are low</span></li>
</ol>
</li>
</ol>
<ol style="text-align: justify;">
</ol>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">The chart below of Gold futures shows a strong trend being confirmed by a 
    strong increase in volume</span></div>
<div id="adsense_abovepic">
</div>
<div style="text-align: center;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"></span></div>
<div style="text-align: center;">
<div style="text-align: center;">
<div class="separator" style="clear: both;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh9BwZgU_12SE8l0QHfpLjT_XvZ0XcqROkYYf-kwBguNqRTTas1PH2ExbSSIrmIF6FxcHSsN7VV-9cXiym99rPgBkSyiU1rdLalEi2lRMKk_56WMv3qDnyRPNGXG71d_B5LRkvoa9d1Eg/s1600/unnamed.gif" />  </div>
</div>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">The chart above of Gold shows that when prices began making new highs, volume 
      increased. As the price of Gold increased, more and more buyers (buying 
      pressure) jumped on board. </span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Likewise, if prices are heading downward and are making new lows and volume 
      increases, the sellers are becoming more and more interested as price falls 
      (increased selling pressure).</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<h4 style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Importance of Volume when Analyzing Price Movements</span></h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">The following is an extreme illustration of the importance of volume:</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<ul style="text-align: justify;">
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">A buyer places a market buy order after hours for 10 shares of stock. The 
        transaction occurs one dollar above the closing price. Therefore, the one dollar 
        price move had 10 shares worth of interest from a buyer. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">A buyer places a buy order for 100,000 shares of stock. This transaction 
        takes place at a price that is one dollar above the current price. </span></li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Which example is more bullish? They both increase the last transaction price 
      by one dollar. If a trader didn't use volume, he/she would think that the move 
      was identical from a price chart perspective. Of course, the second example is 
      more bullish because the one dollar more the buyer of the 100,000 shares is 
      willing to pay is significant (the buyer is bullish and is taking a large bet to 
    prove it); whereas, in the second example, 10 shares is insignificant.</span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">Increases or decreases in price along with increased volume isn't always 
      confirming of trend. </span></div>
<div style="text-align: justify;">
<h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume Spikes & <span style="font-family: "arial" , "helvetica" , sans-serif;">Blow-offs</span></span></h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Extreme increases in volume along with extreme rises or falls in price can 
sometimes be interpeted opposite to regular volume analysis:</span><br />
<ul>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">Sharp increases in price and sharp increases in volume can mean bulls have 
        been exhausted, all buyers have bought and there is no one else but sellers; the 
        result is bearish. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">Sharp decreases in price and sharp increases in volume can mean that 
        everyone that wanted to get out of the stock or future has; therefore, there are 
        only buyers left - bullish sign. </span></li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">The chart below of eBay (EBAY) stock illustrates a volume spike, defined as 
      at least two times the average volume:</span><br />
<br />
<br />
<div id="adsense_abovepic">
</div>
<div style="text-align: center;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"></span></div>
<div id="image">
<div id="adsense_abovepic">
</div>
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqChkHH6KAwsx4XDTwM7TlGnZzbQSZzAd7peTiC3VRZxvQHAg2ugdHOufeqgzGnIUkqk4pVF8exjpEvG-HeoPXP6_xtHr0CJtVhMRgs1ESzingrbMXnm-h-3b7CB5mGCNCiyDfrDDX_dM/s1600/unnamed+2.gif" /> </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div style="text-align: center;">
<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume extremes occur at bottoms as well, which is shown below in the chart  </span><br />
<br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhw7aZwJ0kc1_kOnfEyJfmDbq9Ge0r7_FxJb9Q0anFs-arRxou-SXDYl763mS7wvYoOKuw8tF_SGNAGzlwH2sGulYSe2yEnOY55Piy5q0JyheyOBhqmFEbwG_KMCFf7b8dhpuGGdRab5RQ/s1600/unnamed+3.gif" /> </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
</div>
</div>
<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">A strong understanding of volume is an absolute necessary addition to price 
analysis. Knowing when price increases or decreases have firm support or knowing 
when either buyers or sellers have been exhausted is extremely useful when 
trading. Another way of visualizing volume is Volume Rate of Change  and the Volume 
Oscillator.</span></div>
<div style="text-align: justify;">
<h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume Rate of Change</span></h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">The Volume Rate of Change indicator measures the percentage change of current 
volume as compared to the volume a certain number of periods ago. The Volume 
Rate of Change indicator can be used to <b>confirm price moves</b> or <b>detect 
divergences</b>. The formula for Volume Rate of Change is expressed below:</span><br />
<ul>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">[(Current Volume / Volume <i>n</i> periods ago) - 1] x 100 </span></li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Generally, the Volume Rate of Change is calculated based on 14-periods for 
      input <i>n</i>, but of course can be modified to any trader preferred period. 
      A chart of the 100 ounce Gold futures is shown below with the 14-day Volume Rate 
      of Change indicator:</span><br />
<br />
<div style="text-align: center;">
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="330" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioS1zuWtn-ofgPUoDA5Rp4lxf5mjE2VvAtaCB22mGOTNR-bDgfWEs6LS8LreqhHCa4bJHe2sXI-eMGCdCEx5jh2rIm4w5jusMFpfvNcosfHQMTq3mgMGxjIpAuubiql96paJrbF1JFeDo/s1600/unnamed+4.gif" /> </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"></span></div>
<div id="adsense_abovepic">
</div>
</div>
<div style="text-align: justify;">
<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">As the price of Gold was increasing, the Volume Rate of Change indicator was 
increasing as well, indicating that there was buying interest as prices were 
rising. When Gold broke above trendline resistance, the Volume Rate of Change 
indicator surged higher, showing that buyers were extremely interested in buying 
Gold. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">Using volume to confirm price analysis can help a trader make better trading 
      decisions. The section discussing how to interpret Volume would be an excellent 
      addition to this Volume Rate of Change section (see: Volume).</span><br />
<h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume Oscillator</span></h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">The Volume Oscillator consists of two moving averages of volume, one fast and 
one slow. The fast volume moving average is then subtracted from the slow moving 
average. The Volume Oscillator is interpreted using the same principles as volume analysis:</span><br />
<ol>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">An increase or decrease in price accompanied by an increase in volume is 
        considered a sign of strength in the prevailing trend. Therefore, when the fast 
        volume moving average (default 14-period) is above the slow volume moving 
        average (default 28-period), the Volume Oscillator is above the zero line and is 
        confirming price direction, whether it be up or down. </span></li>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">An increase or decrease in price accompanied by a decrease in volume is 
        considered a sign of weakness in the prevailing trend. Therefore, when the fast 
        volume moving average is below the slow volume moving average, the Volume 
        Oscillator is below the zero line and is warning that the price direction is 
        lacking strength and conviction. </span></li>
</ol>
<span style="font-family: "arial" , "helvetica" , sans-serif;">An example of the Volume Oscillator is presented next in the chart of the 
      E-mini Russell 2000 Futures contract<span style="font-family: "arial" , "helvetica" , sans-serif;">-</span></span><br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO04z2-Rz3vaGODP70RSm-rK1aBnvm65-g786klD3sf9kpdzDYQUD-qgeheRr9sxILq1txgLiPIUmI61W0rE0qMeTfhH3b1_UsjHFgHFcHV1itbHGPci5XlnDYOZGS10DskUPmT3igVCY/s1600/unnamed+6.gif" /> </div>
<div id="adsense_abovepic">
</div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">The fact that price is making higher highs and higher lows is a bullish sign. 
When the price increases in the Russell 2000 e-mini is combined with the Volume 
Oscillator making higher highs and higher lows, a double bullish sign is given. </span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    The Volume Oscillator can be used as a confirmation indicator, as it was 
      above with the Russell 2000 e-mini future, or it can be used to detect 
      divergences.</span></div>
<div style="text-align: justify;">
<h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume Oscillator Divergences</span></h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    
    </span><span style="font-family: "arial" , "helvetica" , sans-serif;">Volume Oscillator divergences occur when there is an increase or decrease in 
price which is accompanied by a decrease in volume. When this divergence occurs, 
the fast volume moving average (default 14-period) is below the slow volume 
moving average (default 28-period) and the Volume Oscillator is below the zero 
line. These divergences are warnings that the current price direction is lacking 
strength and there is potential for a trend reverse.</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><span style="font-family: "arial" , "helvetica" , sans-serif;">An example of a Volume Oscillator divergence is presented below in the chart 
      of the E-mini Russell 2000 Futures contract:</span><br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibk8-utj9q57q1VQ6MYsrFaTu7vf_c5GvnJJ56Wyr-uBH_H0XxQR_2zaMMlFe5jzi5ydnZ49Pkgxwk5WaB10oDVTCW0XKp-WpD0loMp0lILMZXEdPIa3V7Xg3X8fC9UhEQCdDB4DRaL54/s1600/unnamed+6.gif" /> </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    
      </span><br />
<div id="adsense_abovepic">
</div>
<div style="text-align: center;">
<div style="text-align: left;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">
      </span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;"></span></div>
<div style="text-align: justify;">
<span style="font-family: "arial" , "helvetica" , sans-serif;">When the price was increasing in the Russell 2000 e-mini, the Volume Oscillator 
was not confirming the price movement because it was decreasing making repeated 
lower highs and lower lows. This bearish divergence indicated that the recent 
price increases were not being made with volume strength. The bearish divergence 
was confirmed when the e-mini future's upward trendline support was broken. However, when the Russell 2000 e-mini futures contract made its downturn, the 
      Volume Oscillator confirmed the price downtrend by making higher highs and lower 
      lows, a signal that volume was increasing and thus indicating that the trend 
      downward had strength.<u> </u>The Volume Oscillator is a helpful addition to any technical trader's 
      toolbox. Analyzing volume gives traders another viewpoint for analyzing 
      potential trades. </span><br />
<h4>
Volume Accumulation</h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">The Volume Accumulation indicator combines volume and a price-weighting that 
      <b>shows the strength of conviction behind a trend</b>; the Volume Accumulation 
indicator is a helpful tool in uncovering divergences. The formula for the 
Volume Accumulation formula is shown below:</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><br />
<ul>
<li><span style="font-family: "arial" , "helvetica" , sans-serif;">Volume x [Close - (High + Low)/2] </span></li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><span style="font-family: "arial" , "helvetica" , sans-serif;">The formula only gives positive volume to the day if the close is higher than 
      the midpoint of the high and low. If the close is towards the lower half of the 
      range of the price action, then volume is negative for the day. A chart compares 
      the Volume Accumulation indicator with the On 
        Balance Volume indicator that adds positive volume if the close is higher 
      than the previous close, even if the close is only a penny higher, is given next 
      of the stock:</span><br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDtQm-GePjifEWbOXa1kfMhSoEs1pItV3MljCVTh2JUiQVnRxmlhVq-7VW-p_j2SH7N0Lr4JAtoIYkjnvvaxu0KVHniYQ2qakjyC0MoCjd03brl6_QIstAPaIiFjh-R93Sy-ri9blcWY4/s1600/unnamed+7.gif" /> </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>

<br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<br />
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">As can be seen in the chart
above, Volume Accumulation was giving a more realistic representation of what
the stock of Citigroup was doing - going downward. The logic behind the Volume
Accumulation technical analysis indicator is follows: </span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><br />
<ul type="disc">
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">An up day on high volume is considered bullish, because
     volume is being transacted at higher prices; for example, there is an
     imbalance of supply and demand, demand is more than supply, therefore
     price increases. The fact that there is much volume shows that the size of
     the supply and demand imbalance is large. </span></span></li>
<li class="MsoNormal" style="mso-list: l0 level1 lfo1; mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; tab-stops: list .5in;"><span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">A down day on high volume is considered bearish,
     because volume is being transacted at lower prices. With an imbalance of
     supply and demand, there being more supply than demand, then prices will
     go down. Since their is high volume, this is a bearish signal because
     there were many more stock traders and investors trying to get out of
     their position and willing to do that by asking a lesser price. </span></span></li>
</ul>
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">An important use of the Volume
Accumulation indicator is to confirm price movements and show divergences
between the indicator and prices, signaling a potential reversal in trend. </span></span></div>
<h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Volume Accumulation Divergences</span></h4>
<span style="font-family: "arial" , "helvetica" , sans-serif;">Any increase or decrease in price with little volume is to be looked upon 
with skepticism. The Volume Accumulation indicator helps show instances where 
price is making new highs or lows, but the indicator is failing to confirm those 
price moves. Also, the Volume Accumulation technical indicator can confirm price 
movements.</span><br />
<span style="font-family: "arial" , "helvetica" , sans-serif;">
    </span><span style="font-family: "arial" , "helvetica" , sans-serif;">The chart below of the contract shows examples of 
      these divergences, both bearish and bullish:</span><br />
<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<img border="0" data-original-height="350" data-original-width="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkzmttFfen2hVhMhMPruYPZGf-nlfk2FMhWI-W5NKXI_GgCin_OTepEtUeJI6OdVzvPAVB910IWqXqL-Wxp3LEAg1_E-4kdv8wXxhoRZLDpUtW6OyBjjovFFDkSAIthk8hzX22a4m39gE/s1600/unnamed+8.gif" /> </div>
<div class="separator" style="clear: both; text-align: left;">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
</div>

</span><br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">The E-mini Russell 2000 future
made a lower high; this move lower was confirmed by the Volume Accumulation
indicator which made a lower high as well.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; mso-outline-level: 3;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="font-size: 13.5pt; mso-bidi-font-family: "Times New Roman";">Low #1 to Low #2</span></b></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">The emini futures contract made
a lower low; however, the Volume Accumulation indicator did not confirm this
move. Instead, the indicator made a higher low, a bullish divergence suggesting
that the bottom had arrived in the price of the futures contract. This bullish
divergence was a strong indication for traders to lessen the size of their
short positions or even buy to cover all their short positions.</span></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto; mso-outline-level: 3;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><b><span style="font-size: 13.5pt; mso-bidi-font-family: "Times New Roman";">Low #3 to Low #4</span></b></span></div>
<span style="font-family: "arial" , "helvetica" , sans-serif;">

</span><br />
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="mso-bidi-font-family: "Times New Roman";">The Volume Accumulation is a
very useful technical analysis tool that combines both price and volume. Other
similar technical indicators include Chaikin Oscillator<span style="font-family: "arial" , "helvetica" , sans-serif;"> </span>and Money Flow Index.</span></span></div>
<div class="MsoNormal" style="mso-margin-bottom-alt: auto; mso-margin-top-alt: auto;">
<h2>
<span style="font-family: Arial,Helvetica,sans-serif;"><u><i>Key takeaways  </i></u></span></h2>
<span style="font-family: Arial,Helvetica,sans-serif;">
</span><ol>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Volumes are used to confirm a trend</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">100 share buy and 100 shares sell makes the total volume 100, not 200</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">The end of day volumes indicates the cumulative volume across trades executed throughout the day</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">High volumes indicates the presence of smart money</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Low volumes indicate retail participation</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">When you initiate a trade to either go long or short always make sure if volumes confirm</span></li>
<li><span style="font-family: Arial,Helvetica,sans-serif;">Avoid trading on low volume days</span></li>
</ol>
<br />
<div class="separator" style="clear: both; text-align: center;">
<iframe allowfullscreen="allowfullscreen" frameborder="0" height="266" mozallowfullscreen="mozallowfullscreen" src="https://www.youtube.com/embed/RkrP3Yv4dic?feature=player_embedded" webkitallowfullscreen="webkitallowfullscreen" width="320"></iframe></div>
<br /></div>
</div>
</div>
</div>
</div>

Volume Volume Study 19. Volume : Volume Analysis

Definition of Volume Analysis The examination of the number of shares or contracts of a security that have been traded in a given t...

31. Price Volume Trend (PVT)

19. Volume : Volume Analysis