Volume

Volume is a measure of the number of shares traded in any market, the market volume can be calculated by the number of units traded multiplied by the share price.

Market exchanges track trading volumes daily. Volume also reflects pricing momentum. When market activity — i.e., volume — is low, investors anticipate slower moving (or declining) prices. When market activity goes up, volume typically moves in the same direction.

Volume Explained

Whenever, any transaction happens between a seller and buyer of a security, it increases the total volume of the security. A transaction is said to happen when a buyer agrees to buy what the seller is offering at a specific price. If ten transactions happen in a day, the volume of the security for that day is noted as ten.

Example

Volume is calculated for a specific time frame, so let’s suppose for a 1-hour period,1200 shares were transacted in the exchange, then we can say that the volume was 1200 shares.

Financial analysts often take help of bar charts in determining the volume levels of a security. It also helps them in seeing trends in volume. If the bars are higher than the mean levels, it signals high volume at a specific market price.

Significance of Volume

Many investors use technical analysis to decide when to buy a stock and volume makes a very crucial part of the technical analysis. Through technical analysis, investors try to make decisions regarding entry as well as exit price points, and volume levels provide those clues.

Volume is an important factor in technical analysis. It helps in determining the implications of market movement. Whether a significant movement in the market is given credibility or is seen with scepticism depending upon the volume levels for that period. If volume is higher during the price move, it is considered more credible. If the volume levels are low, then the price move is considered to be of less significance.

High-frequency traders (HFT) and index funds have now started to play a significant role in the statistics on trading volume in U.S. markets. A 2017 JPMorgan analysis found that high-frequency algorithmic trading and passive investors like ETFs and quantitative investment accounts accounted for about 60% of all trading volumes, while “fundamental discretionary traders,” or traders who consider the fundamental aspects of a stock before investing, made up only 10% of the total.

Volume also becomes important in an auction process as it is often used as a measure of strength of a security. When both buyers and sellers of a security become very active on a particular price point, it suggests that the volume is high.