If someone ask you what is volume in stock market? Most of us will say, it is no. of shares bought and sold for any any stock over a period of time, if we ask can you be little more specific?

See, it’s very simple, suppose i bought 100 shares and you sold 100 shares than the volume that’s get created out of this trade is 200, Great, but that is not true.

Volume in stock does not get counted as we do addition in math 2+2=4, it is 2+2=2. So, let us clear many of our concepts regarding volume in stock market and how it can help you in trading and investing though different volume based strategies.

What Is Volume In Stock Market?

The term “volume” in trading indicate to the total number of shares that are traded in during a given period of time. That time can be of any frame(30min,1 hour, day ,month, year).

The volume of trade is calculated on all types of financial instruments, including stocks, options contracts, bonds, futures contracts, commodities, etc.

Every transaction that takes place between a buyer and a seller of a security contributes to the total volume count of that security.

In trading terminology, volume is a kind of technical analysis used to know current or future trends and patterns for an individual stocks, options contracts, futures, index like nifty, bank-nifty or the entire stock market.

Volumes help you to find, how many shares have been bought and sold in a given period of time in reference to an individual stock, a consolidated group of stocks, or with the entire market under consideration.

While trading or investing in stock market, you might have not paid that much attention to it, however knowing this wonderful tool can certainly help you to place better trades at correct timing.

You should look at volumes in case you want to find about the present perception of stock market participants(traders or investors).

Volume data for any security is easily available on your trading platform provided to you by your broker. Here how volume looks like on a trading software marked in yellow color:

As, you can see above there are various stocks listed, with different traded volume for the day. Before we dig deeper about the volume and its implication in stock market, let us know how it gets calculated.

How Volume Gets Calculated In Stock Market?

Stock market or for that matter any market works based on demand and supply, this demand and supply is created by buyers and sellers in the market.

Likewise, in stock market for all buyers, there has to be the sellers, so that the trade gets completed by changing quantity of shares bought and sold.

As an illustration suppose if you buy 100 shares of google at some price, and your friend sell 100 shares of google at the same price.

You and your friend together have created a volume of 100 shares in total. Many traders not only newbie, makes an assumption that volumes count for above will be 200 (100 buy+100 sell), which is wrong.

It’s critical to note that when counting volume, each buy/sell transaction is counted only once.

Check image above, orange box tells about the market timings, buy & sell quantity with cumulative(growing) volume its creating at every passing time during live market.

In total the volume that got created at the end of the trading session for the day is 3400, basically for every buy/sell quantity its get added only once(300+300=300).

This happens in live market at every microsecond, because of this fight between buyers and sellers for the best price creates short-term price movement.

How Volume Works In Stock Market?

Volume in general indicates traders and investors about the stock market’s activity and liquidity.

Liquidity refers to how quickly an investment can be bought or sold without negatively or positively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa).

Higher trade volumes for any security mean higher liquidity, better trade execution and a more active market for a buyer and seller.

Another point to be noted, when investors or traders feel reluctant about the direction of the stock market, futures trading volume tends to increase, which often causes options and futures of that securities to trade more actively.

Volume expected to be higher near the market’s opening and closing times. You will also observe high volume on Mondays and Fridays. Whereas it gets lower at lunchtime and before a holiday but these are very generic cases.

Volume in particular for any stock or market can jump high because of any positive or negative news or rumors or any big event related to stock or overall stock market.

However the thing is now you know what volume is, but how this going to help you and benefit you while you trade or invest. Merely seeing volume does not give any idea as to what exactly is happening in a particular stock.

When analyzing volume, there are certain guidelines one can use to determine the strength or weakness in a trend. Volume can be very useful in identifying the bullish and bearish signs in a stock or index.

So next we will be learning about the implementation of volume.

Volume also reflects the supply and demand in market or for a stock. A stock with low volume is said to be illiquid. When volume is low, the spread between what buyers are willing to pay and what sellers are asking to take (bid-ask price) will increase, making successful trades more difficult to make.

As a result, selling an illiquid stock quickly can be difficult or impossible without accepting the lower bid price.

Also, because the spread is wide, illiquid stocks are given to large price fluctuations in either direction when they do trade. So please avoid stocks with low liquidity with low volumes in share market.

Best Volume Based Trading Strategy:

Volume is an important indicator in technical analysis in stock market, many traders and investors use volume based technical analysis, as a strategy to make decisions about when to buy or sell a stock.

Volume levels helps in identifying various entry and exit points.

However, before we know more, I want to make you aware about the types of market participants for a simple reason, once you are aware of them, you will look at the market from a different point of view.

Retail trades and investors like us, thinks the market is mostly run by common investors, but in the background these are the real players (also known as smart money).

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Types of market participants in stock market

• Domestic Retail Participant – Common people like you and me falls into this category, we are more in number but hardly creates volume.
• NRI and OCI – Non resident Indians or overseas citizen of India. They are based out of India but born in India.
• Domestic Institutions (DII’s) – Domestic Institutional Investors or DII refers to the Indian institutional investors who are investing in the financial markets of India. They are huge corporate organisation based in India. Most of them are big insurance companies, mutual fund companies like SBI MF.
• Domestic Asset Management Companies (AMC) – An asset management company (AMC) is a firm that invests pooled funds from clients, They put there money to work in different investments including stocks, bonds, etc. Some Typical examples ICICI Prudential Mutual Fund. HDFC AMC, SBI MUTUAL FUND etc.
• Foreign Institutional Investors (FII’s) – These are non- Indian corporate organisations or entities, Foreign Asset management companies,  pension funds, investment banks, hedge funds etc.

The motive to know them has lot to do with volumes. As I mentioned above, retail traders have a very small role in creating high volume, the primary reason are big players in market.

When these institutional investors buy or sell they do not transact in small amount of shares like us.

Suppose if Domestic Asset Management Companies like ICICI Prudential Asset Mgmt. Company Limited, buying shares of any stock, it will be in huge quantity may be in millions and crores, this will lead to have a significant impact in price of the stock as well as the volume.

Now, we know each type of participants in market we are in better position to understand further about volume and its impact on a stock.

Let us take an example by plotting a volume bar indicator on a chart, to see exactly how it looks like:

Above is SBI BANK (1hour) chart, below the candles you can see the volume bars, I have also plotted a moving average (26 day SMA) to know if today’s volume is higher than the previous days volume average.

As, you can see the volume bars going crazy during certain time period, but before we know how to take advantage of them let us know the steps to read what this volume bars are telling.

How To Read Volume Bars On Chart?

Volume information in isolation has no value, suppose you checked and got to know the volume in TATA Motors stock is 4,23,58,626.

What you will be going to do with this? However when you relate today’s volume information with the previous price and volume trend, then volume information becomes much more meaningful.

To read and interpret the volume correct way, one has to know the volume trend table listed below, take a look.

Above table clearly shows and inform you when to make an entry or exit while placing an order. Let us understand them one by one.

Price is increasing with increase in volume indicates bullish trend. But is it increase in volume of today, what is the reference point here?

So when you compare the volume you do it with the previous volumes aggregate. For example you can compare the today’s volume in relation to last 10,20,30 or 50 days. Recent sets of data is more relevant in comparison to older.

If there’s a higher volume in a particular stock, that generally means that investors(big) are interested in buying or selling it. If volume and price are on the rise, it means the investors may have stake or betting on that stock.

Whereas if volume is up but price is down, it means more investors are looking to sell. However retail traders thinking this as an opportunity to invest or trade.

Also remember higher volume for a specific security results in higher liquidity as we have discussed above.

Understand volume in reference to above volume trend table :

• If both Volume and Price Increases, it reflects the bullishness, stock may rise in further trading session. Look for buying.
• Whereas, if volume are decreasing but stock price is increasing than, there are more retail participation rather than institutional investors. You need to avoid such situation as it might be a bull trap.
• Whereas if volumes are increasing but price of stock is decreasing than bigger investors are selling, therefore view on stock should be bearish. One should look at selling.
• If both volume and price are decreasing than it means the price is decreasing because of small retail participation, and not because of institutional investors are selling. Because if volume are decreasing it simply means there is no participation from huge investors.

Volume is also decreasing as retailers are selling rather than big investors. This situation can lead to bear trap, one need to avoid placing trade in such scenario.

A counter trade or position can be made, Stick with your trade if you are long (bought), but do not look for buying, you can go short but chances of trend getting reversed is more, so be careful.

Let us understand this through a recent big activity happen in RELIANCE (day chart), look at the chart below:

Facebook buys 9.99% stake in Reliance Jio for Rs 43,574 crore, and with this news there was increase in price of the stock with the volume, telling the bullishness(even amid covid-19 pandemic), the surge was huge comparing with pre-covid world.

Moreover reliance also announced on 14 may 2020, about the stock going ex-right issue(shares at discount price). The rights issue has been priced at Rs 1,257, a discount of Rs 210 or 14 per cent from the previous close.

This lead to steep fall in price as well as selling was seen with huge volume, but later the selling volume was melted down, and next candle showed a jump in volume.

I have also plotted a 26 day SMA, at the volume bar chart showing the average volume went much higher during this period compared to previous 26 day moving average, suggesting further bullishness.

You can easily draw a moving average on the volumes bar to know if today’s volume is higher than the previous days volume average of 5,10,20, 50 etc. days. All you need to do is draw a moving average line on the volume bars on your trading software which you can do in few clicks.

When the bars on a chart are higher than average, it’s a sign of high volume or strength at a particular market price. By observing volume bar charts, you can use volume as a way to confirm a price movement.

If volume increases when the price moves up or down, it is considered a price movement with strength.