10.06.2019
*AAKASHAYA PATRA SEVEN STAR SMART EDUCATION SERIES PART – 11
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VOLUME
What is Volume?
Volume is simply the number of shares or contracts that trade over a
given period of time, usually a day. The
higher the volume, the more active the security. To determine the movement of the volume (up or
down), chartists look at the volume bars
that can usually be found at the bottom of any chart. Volume bars illustrate
how many shares have traded per period
and show trends in the same way that prices
do.
Why Volume is Important
Volume is an important aspect of technical analysis because it is used
to confirm trends and chart patterns.
Any price movement up or down with relatively high volume is seen as a stronger, more relevant
move than a similar move with weak
volume. Therefore, if you are looking at a large price movement, you should
also examine the volume to see whether it
tells the same story.
Say, for example, that a stock jumps 5% in one trading day after
being in a long downtrend. Is this a sign
of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the
average daily volume, it is a sign that the
reversal is probably for real. On the other hand, if the volume is below
average, there may not be enough conviction
to support a true trend reversal.
Volume should move with the trend. If prices are moving in an upward
trend, volume should increase (and vice versa).
If the previous relationship between volume and
price movements starts to deteriorate, it is usually a sign of weakness
in the trend.
For example, if the stock is in an uptrend but the up trading days
are marked with lower volume, it is a sign
that the trend is starting to lose its legs and may soon end.
When volume tells a different story, it is a case of divergence,
which refers to a contradiction between two
different indicators. The simplest example of divergence is a clear upward trend on declining volume.
Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such
as head and shoulders, triangles, flags and
other price patterns can be confirmed with volume, a process which we'll describe in more detail
later. In most chart patterns, there are
several pivotal points that are vital to what the chart is able to
convey to chartists. Basically, if the
volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern
is weakened.
Volume Precedes Price
Another important idea in technical analysis is that price is
preceded by volume. Volume is closely
monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease
in an uptrend, it is usually a sign that
the upward run is about to end.
Now that we have a better understanding of some of the important
factors of technical analysis, we can
move on to charts, which help to identify trading opportunities in prices movements.
Technical Analysis: What Is A Chart?
In technical analysis, charts are similar to the charts that you see
in any business setting. A chart is simply
a graphical representation of a series of prices over a set time frame. For example, a chart may show a
stock's price movement over a one- year
period, where each point on the graph represents the closing price for each
day the stock is traded:
an example of a basic chart. It is a
representation of the price movements of
a stock over a 1.5 year period. The bottom of the graph, running horizontally
(x-axis), is the date or time scale. On the right hand side, running vertically (y-axis), the price of the
security is shown. By looking at the graph we see that in October 2004 (Point 1), the price of this
stock was around Rs.245, whereas in June
2005 (Point 2), the stock's price is around Rs.265. This tells us that the stock has risen between October 2004 and June 2005.
Chart Properties
There are several things that you should be aware of when looking at
a chart, as these factors can affect the
information that is provided. They include the time scale, the price scale and the price point
properties used.
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