Learn How to Use Volume in the Stock Market

Technical analysis is crucial for traders who wish to capitalize on short-term price movements in the stock market. However, many beginners often focus solely on the stock price in technical analysis. While the price is undoubtedly fundamental to trading, it is not the only indicator you need to focus on. It is also essential to consider the share trading volume in the stock market. 

Not sure what the trading volume is and why it matters? In this article, we’ll answer all your questions and most importantly, delve into how you can use the stock volume to your advantage. 

What is the Trading Volume?

The trading volume in the stock market is a measure of the quantity of stocks traded in a given period. In other words, it measures the number of shares that have been bought and sold in the stock market during a specific time frame. Most often, the trading volume is calculated daily — to measure the number of shares traded between the day’s open and closing times. When combined with the price, the stock volume can be an extremely useful technical indicator. 

Why is the Trading Volume Important?

For traders, the trading volume is important because it is a direct measure of liquidity. It offers insights into the prevailing level of interest in a particular stock. The higher a share’s volume in the stock market, the more its liquidity and the more traders are interested in that particular stock. 

Liquidity is crucial because trading in illiquid stocks can be a dangerous proposition. If the trading volume is low, it indicates that the stock is not easily tradeable. This means you may be unable to open a new position at the desired price level. Worse, you may be unable to close existing positions and exit the market when required. This could lead to mounting losses. 

How to Find Volume in the Stock Market?

You can use stock market volume charts to find the volumes for different stocks. Many price charts also have the option to include volume data, so they act as both price charts and stock market volume charts.

Once you learn how to find the trading volume, you also need to know how to interpret the data available. Broadly, this is what high and low volumes in the stock market mean when read separately and alongside the price data. 

• Liquidity 

On its own, volume in the stock market is a measure of liquidity. High volumes mean high liquidity, while low volumes indicate illiquid markets for the concerned stock. 

• Trend Momentum

When combined with price data, the information you obtain from stock market volume charts can help you understand if a trend is gaining strength. Typically, if the volume is high or increasing along with rising prices, it signals an ongoing and strong bullish trend. On the other hand, if the volume is high or increasing but the prices are declining, it indicates that a bear market is gaining strength. 

• Trend Reversals

Divergences between price and volume may signal trend reversal rather than trend continuation. For instance, if the price is rising but the trading volume is reducing, it means that buyers are losing control of the market. This may be one of the many conditions conducive to a bearish reversal. Conversely, if the prices are falling and the volume in the stock market is also declining, it may be a sign of a weakening bearish trend and a potential bullish reversal. 

Best Ways to Use Trading Volume to Improve Your Traders

Now that you know how to find and interpret the data in stock market volume charts, let us discuss how you can use this information to your advantage. 

• To Confirm the Strength of a Trend

You can use the stock volume to validate price trends. Rising prices accompanied by increasing volumes suggest a strong uptrend, which may be a good time to take a long position. Falling prices with high volumes signal a strong downtrend, which may be suitable for shorting. Volume confirmation also helps you avoid false breakouts. 

• To Identify Potential Reversals

Look for volume divergences from price action. If the volume falls amidst rising prices, you may need to be prepared for a potential downward price reversal. However, if the volume falls amidst declining prices, you may need to brace for an upward price reversal. This can help you take positions accordingly or close existing trades before they turn red. 

• To Evaluate Support and Resistance

Pay attention to the volume in the stock market at key support and resistance levels. High volumes at these key price points can indicate strong buying or selling pressure. This may lead to potential price breakouts or bounces. You can use this information to set more effective stop-loss and take-profit levels. 

• To Assess Breakout Possibilities

When price breakouts are accompanied by high volumes in the stock market, it often confirms that the breakout is legitimate and not a temporary breach. If a stock’s price breaks above a resistance level or below a support level with significantly higher-than-average trading volume, it is less likely to be a false breakout. 

• To Evaluate Market Interest

You can also use the stock volume to gauge the overall market interest in that instrument. Consistently high trading volumes suggest strong investor interest. This may lead to increased volatility and better trading opportunities. On the flip side, low volumes may indicate a lack of interest and offer potentially range-bound trading opportunities. 

• To Time Your Entries and Exits

Volume analysis can also help you improve the timing of your trades. Ideally, you must enter new trades when the trading volume confirms the price movement you are expecting. Similarly, you can consider exiting trades when the patterns of volume in the stock market suggest that the current trend may be weakening. 

Conclusion

To sum it up, trading volume can be extremely useful in stock trading. So, ensure you factor in the volume in the stock market before you make any decisions about trend reversals or continuations. 

In addition to this, using a platform like Motilal Oswal's Research 360 can enhance your trading experience significantly. Research 360 offers real-time volume data alongside other critical indicators that allow you to perform in-depth technical analysis. You can track live trading volumes, compare them against historical data and even overlay this information with price charts to get a clear picture of market sentiment. 

The platform offers comprehensive insights about volumes over different time frames — including from the current trading day, the previous trading day and the weekly, 1-month and 3-month averages. You can also find lists of stocks that are high-volume gainers or losers to make more informed decisions about which companies to trade in and when to enter or exit positions. This makes Research 360 a valuable tool for both beginners and seasoned traders looking to leverage volume in their trading strategies