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Importance of Volume in Trading

Home > Trading Resources > Importance of Volume in Trading

Importance of Volume in Trading

Posted on September 17, 2018September 6, 2020 by smile
0

Trading Volume is the number of shares traded in the stock exchange in a day. This reflects the interest
of the traders and then having a huge impact in the share price. If the volume increases more people are
interested in the share either for trading or for taking delivery. Taking delivery can be assessed by the
delivery quantity. It is the advance indication that the volume increase or decrease gives us some
information about the price movement.

If volume increases with price increase, that means the share price will have more upside. If the volume
increases with price decrease it shows the share is in down trend. Below chart clearly indicates the
relationship of volume and its price.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If we analyze the above chart, one can notice that the price increase or decrease starts with huge
volume. Price starts to move up with increase in volume, sometime it is difficult for a trader to enter in
to the trade the very first day of move, in such a case the trader can enter in the next day. Likewise, any
down trend also happens with huge volume and this is the indication that the price might move down.
Sometimes, the share may not move in any direction, this is called as “Empty Zone”. When a share is in
empty zone, the direction of the price movement is not clear. A share may be in the empty zone for a

week, month, or sometimes it stays in empty zone for longer period. During the empty zone period, the
price will be range-bound. The share price may not have considerable move that means the share price
may not increase or decrease but will trade in a limited range of up and down. If a trader enters during
empty zone, the money invested will be idle and the trader will not be able to book profit or will lose
some part of the money. This situation is called as trapped in empty zone.
It is always important for the traders to have a look at daily volume and its price. It is to be understood
that the volume alone is not the deciding factor but it gives us some indication so that the traders can
plan their trades accordingly.

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