Volume analysis is one of the most integral parts of a trading plan or startegy , volume refers to the number of shares that have changed hands for example, if Mr. X plans to buy 1000 shares at 100 Rs and another Mr. Y plans to sell his holding of 1000 shares at Rs 100 , then through automatic order matching system the shares are trasferred from the seller Y to the buyer X , in general you just need to place your order and the system automatically matches the orders of buyers and sellers , so in this example 1000 shares have changed hands thus making the volume 1000 , likewise volume increases throughout the day as more trading keeps place , always keep in mind to trade in stocks with good volume as stocks with low volume are not good for trading purpose , in low volume stocks a trader can get stuck due to non availability of people buying or selling in that script , hence an order may not go through hence trapping the trader in the stock.
So now we have learned what volume means in trading , now we need to know how to use volume for making trading decisions , imagine a normal retail trader buying shares , how many shares will he/she buy ? 50 , 100 , 500 ? Yes retail traders generally buy a small amount of shares due to constraints on their capitals , meanwhile imagine a large FII or DII buying shares , will they buy 500 shares ? Absolutely no , they trade 10000’s of shares at once hence leading to increase in the volume of a stock.
So what can we deduce from this ? When big players trade more the volume rises much more than when retailers trade , big players are always concidered important as they are the ones who have unlimited resources , huge analysis teams and insider information thus making their trading decisions important than any one elses , so this gives rise to 4 scenarios that we need to understand so that we can base our trading plan on these 4 scenario –
1.When Volume rises and price also rises –
So if volume is rising and the price is also rising this indicates that smart hands or big players might be buying the stock leading to less supply and more demand thus pushing the price up and also the volume , this is the scenario where you should be on the buyers side you don’t want to be shorting a stock in such scenario.
2. When price is increasing buy volume is stagnant of falling –
This indicates that the price is increasing due to demand but the demand is not high enough as volume isn’t increasing indicating that retailers are pouncing on the stock and the smart guys are just watching , you should be standing and just watching while this happens and stay away from such trend as it’s sooner or later bound to fail and reverse.
3.When price decrease and volume also increases –
This is another big guys or smart guys playground , when price is decreasing and the volume is rising that means the big guys are selling or shorting the stock thus leading to heavy volume , they must have seen something wrong in the company itself or some bad news reagrding the stock might be coming which they know before everyone else , so where do you want to be in such scenario ? Yes with the big guys , its the perfect shorting opportunity.
4. When price is decreasing and volume is also decreasing or stagnant –
so in the fourth scenario if the price decreases and the volume also decreases it means either small retailers are shorting or the getting out of their buys , the low volume indicates that smart hands aren’t involved in such trend thus making it bound to sonner or later reverse, you should stay away in this scenario.