Volume Analysis

The study of the total number of securities transacted during a given time span is known as volume analysis (also known as price-volume trend and volume oscillators). It’s a form of technical analysis that looks at the volume of traded securities in order to confirm and forecast market patterns. Volume analysis is utilized by specialized investigators as one of numerous elements that educate their exchanging choices. By examining patterns in volume related to value developments, financial backers can decide the meaning of changes in a security’s cost.

For a given time period, volume refers to the number of units that change hands for stocks or futures contracts. Trading volume is regarded by technical analysts as one of the most important measures of a trading decision’s likelihood of success. Investors can show up at the level of effect of the adjustments in the cost of a security on the return by investigating patterns related with volume, just as value developments. Sudden fluctuations in volume, one of the oldest market measures, are often the product of news-related events. Volume analysis is based on the following principles and is widely used by chartists and technical analysts:

  • The current price trend is confirmed and said to have momentum when the amount of a protection is rising or at a relative peak
  • The current price trend is fragile and said to lack traction when the amount of a security is declining or at a relative minimum
Example of Volume Analysis

The two key concepts behind volume analysis are buying volume and selling volume.

Buying Volume: Since other traders are in the market, waiting to satisfy the other side of your exchange, buyers will have an easier time buying and selling large or small amounts of stock when trading volume is higher. A buyer and a seller are needed in any transaction. This leads to some confusion because buyer will often hear phrases like:

  • The sellers are in control
  • Buying volume is outstripping selling volume
  • It’s a heavy buy volume day

When the price is driven higher, consumers have leverage. The offer price is the lowest advertised price at which sellers can part with their shares, and this is where buy volume occurs. When anyone buys shares at the current offer price, it indicates that they are interested in the stock and is counted as part of the purchasing volume metric.

Selling Volume: When the price is moved lower, sellers have more leverage. At the bid price, sell volume occurs. The bid is the highest advertised price that buyers are willing to pay. When someone tries to sell at the bid price, it means they don’t want the stock (this demonstrates an example of selling volume). The bottom of a stock price chart usually displays volume. Trading volume is shown in vertical bars on charts, with each bar representing how many shares changed hands for a given time span.

Volume analysis is utilized to affirm and anticipate value headings. The hypothesis behind volume analysis lays basically with the understanding that a high exchange volume signals market agreement behind the relating development in cost, and accordingly that the pattern in cost is probably going to proceed. When prices decline in tandem with rising volume, the trend is skewed to the downside.

The normal volume measurement shows the number of offers change turns in ventures on an ordinary day. Every so often will have a lot higher volume than ordinary, while different days see a lower volume. Excessively extreme changes in volume, which can be described as five to ten times the usual volume for that period of time, are a caveat to the rationale outlined above. These cases are alluded to as weariness, on the grounds that there will frequently be nobody left to partake on the lookout, and hence the cost will quit moving along its past direction.

Volume data performs an essential role called trend validation. A increasing volume typically indicates a rising demand. Buyers must have high expectations in order to keep driving rates higher. The number of shares traded every day is referred to as volume. Having a comprehension of the whole market’s exchanging volume versus the volume of a solitary holding can be one significant correlation that assists experts with knowing volume patterns. Expanding quantities of volume information can prompt such an increment in the eagerness of purchasers.

High trading volumes can also reveal a lot about an investor’s attitude toward a market or security. Day traders favor stocks or exchange-traded funds (ETFs) with a high average volume and/or stocks or ETFs that have seen higher-than-usual volume on a given day. Below the norm volume shows lower interest in the stock on that day and likely more modest value developments. A value bounce in disconnection can’t be viewed as a sufficient sign of financial backer certainty. When combined with large trading volumes, however, it sends a clear signal that investor sentiment is positive.

A useful metric for evaluating an asset’s liquidity is volume. Liquidity refers to how quickly an asset can be purchased or sold without having a major effect on its price. A critical cost increment alongside a huge volume increment, for instance, could be a dependable indication of a proceeded with bullish pattern or a bullish inversion. A significant price drop combined with a significant volume rise, on the other hand, can indicate a continuation of the bearish trend or a bearish trend reversal.

Volume can be utilized to recognize bullish signs on the lookout. For instance, consider a circumstance where costs decrease, yet volume increments. Resulting to the event, costs increment and afterward fall once more. As a result, a demand for a security with a large number of buyers and sellers will have a high volume and hence liquidity. Because of the importance of volume in relation to liquidity, some traders use it to develop exit strategies due to the inherent risks of trading an asset with low liquidity.

Joining volume into an exchanging choice can assist a financial backer with having a more adjusted perspective on all the wide market factors that could be impacting a security’s value which assists a financial backer with settling on a more educated choice. If the bulk of the volume was exchanged at the ask price, the stock price would increase (due to demand and price availability). The increased volume indicates that consumers believe the stock is moving and want to buy it. In the event that the lessening in costs the subsequent time doesn’t fall lower than the primary low, the volume at the time decay gets reduced. It is seen as a sign that markets are bullish.

Although it is not needed, keeping track of a stock’s trading volume will help you analyze price movements. There are two common indicators in technical analysis that are designed to help investors who integrate volume into their trading decisions. Paul Dysart developed the Positive Volume Index (PVI) and Negative Volume Index (NVI) in the 1930s. The PVI and NVI are both functions of the previous period’s volume and closing price. When the trading volume increases from the previous period, the PVI is recalculated, and when the trading volume decreases from the previous period, the NVI is recalculated.

Calculating the Positive Volume Index –

If current volume is greater than the previous day’s volume:

PVI = PVIprevious + (CPtoday – CPyesterday / CPyesterday) × PVIprevious


PVIprevious = The previous PVI

CPtoday = Today’s closing price

CPprevious = The previous closing price

​If current volume is lower than the previous day’s volume, PVI is unchanged.

Calculating the Negative Volume Index –

If current volume is less than the previous day’s volume:

NVI = NVIprevious + (CPtoday – CPyesterday / CPyesterday) × NVIprevious          


NVIprevious = The previous NVI

CPtoday = Today’s closing price

CPprevious = The previous closing price

If current volume is higher than the previous day’s volume, NVI is unchanged.

Volume ought to preferably be bigger when the value moves the moving way, and lower while moving against the pattern, called pullbacks. This shows solid development in the pattern course and feeble pullbacks, making the pattern bound to proceed. When the trading volume increases relative to the previous day, the PVI is changed. The NVI, on the other hand, is modified when the trading volume falls below that of the previous day. Many investors pay more attention to the NVI than the PVI, and some claim that noise trading is a major factor in the PVI.

Volume analysis isn’t awesome and it offers just supplemental data, so you don’t have to feel constrained to begin dissecting volume to day exchange effectively. Numerous financial backers accept that commotion exchanging is a huge factor for the Positive Volume Index. As a result, the Negative Volume Index is commonly followed for its insight into the market behavior of skilled traders.

Information Sources:

  1. thebalance.com
  2. investopedia.com
  3. corporatefinanceinstitute.com
  4. wikipedia