Volume Analysis

Last Updated :

21 Aug, 2024

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Table Of Contents

What Is Volume Analysis?

Volume Analysis is a technical indicator for determining a security's overall number of shares or contracts exchanged during a given period in the stock market. It studies relative or absolute changes in a stock's trading volume and helps traders and analysts identify the market trend.

Such a parameter provides valuable insight into a stock's price movement compared to its previous price and volume. A positive volume analysis is when a security is traded a maximum number of times in the open market in a certain period. It indicates the stock's popularity, i.e., the interest of the traders and investors in that investment.

What Is Volume Analysis?

Volume analysis evaluates a security's total number of shares or contracts traded in the stock market during a given period.
The two prominent stock volume indicators are the Positive Volume Index (PVI) and the Negative Volume Index (NVI).
It facilitates the analysts and traders in understanding the market trends, stock price movement, bullish or bearish moves, market liquidity, breakouts, and price reversals.
It reflects the overall market strength since a stock market tends to grow when the trading volumes of the stocks are high.

Volume Analysis Explained

Volume analysis is crucial to examine a particular stock's price movement and trend and determine the strengths and weaknesses of the financial market. Thus, in most cases, it is the key factor behind the success or failure of the traders. When the stock's trading volume and prices rise significantly, it is considered a favorable time for exiting the investment. However, when the stock's trading volume and price go down, the buyers may find an opportunity to enter the market.

Moreover, there are the following two forms of trading volumes and their interpretations:

1. Buying volume: Represents the total number of times a security's shares or contracts are purchased in the given time frame. A high buying volume shows the traders' preference towards the stock and the buyers' positive pressure over the stock price.

2. Selling volume: Reflects the total number of times a security's shares or contracts are sold out in a certain period. A high selling volume resembles the stockholders' distress and urge to exit the investment, thus resulting in the stock's dropping price.

Active shares, bought and sold frequently within a given period, are considered an essential aspect of share market volume analysis.

Hence, volume analysis in trading is an essential step for buyers and sellers to undertake before investing in security. Let us now go through its importance in stock trading:

Confirms Trend: It depicts market trends and patterns where the prices are pushed by the buyers' or sellers' market sentiments.
Identifies Bullish or Bearish Signs: It gauges the stock's price movement concerning the volume, which is bullish when the prices and volume are going up or bearish when prices are falling with rising volume. This makes making the volume analysis indicator a crucial tool for traders.
Locates Price Reversals: It spots the opportunities of price reversals by identifying a stock's huge volume with no or slow price change after a long bullish or bearish movement.
Checks Breakouts: A strong market move is identified with increased trading volume at breakout. A fall in volume shows a possibility of a false breakout.
Market Liquidity: A significant rise in the trading volume reflects high liquidity in the financial market, with many buyers and sellers engaged in trading activities.

How To Do?

Stock analysts and traders use numerous trading volume indicators to identify trading opportunities and determine profitable investing strategies. One of the prominent methodologies proposed by Paul Dysart in the 1930s is used for intraday trading volume analysis:

Positive Volume Index (PVI)

It determines the trading days when the trading volume of the stocks increases. The formula is:

PVI = Yesterday’s PVI +

Negative Volume Index (NVI)

It calculates the trading days when the stock's trading volume falls. The formula is:

NVI = Yesterday’s NVI +

The analysts should work with the recent volumes since the stock markets are highly volatile, and the age-old data seems irrelevant. However, the trading volumes of stocks cannot be analyzed in isolation. They must be compared and examined with other critical information like price level fluctuation, overall market trading volume, and other facts to derive a relevant conclusion and ensure an effective investment decision or strategy. Given below are the various inferences based on a stock's volume analysis:

An increase in trading volume with a rising stock price indicates a bullish trend in the market, i.e., most buyers are showing interest in the security.
A decrease in trading volume with a rising stock price resembles the buyer's interest in the particular stock has decreased.
An increase in trading volume with a falling stock price shows a bearish market trend, i.e., most sellers withdraw their investment by selling the security.
A decrease in trading volume with a falling stock price reflects that the sellers are no longer interested in selling the security.

Examples

Let us now discuss some examples to understand this concept better:

Example #1

Suppose a company, ABC, has a trading volume of 1500 stocks on the first day and 2200 stocks on the next day. The stock price was $72 on the first day and $68 on the second day. However, using the volume analysis, it is evident that the trading volume has increased. This necessitates the calculation of PVI, given yesterday's PVI was 14.2%.

PVI = Yesterday’s PVI +

PVI = 14.2% + = 13.41%

The positive volume index has fallen. This indicates that although the trading volume has increased, there are potentially more sellers than buyers, resulting in falling stock prices.

Example #2

Volume analysis of some renowned companies trading on the US stock market as of April 11, 2023, is shown in the image below:

Source

The image above displays the trading activities of three prominent stocks:

Tesla, Inc. (TSLA) has a 123.857 million trading volume in one day. Also, its price fell by 0.25%. Technical analysts suggest selling the security.
AMC Entertainment Holdings, Inc. (AMC) has a trading volume of 101.554 million and a price rise of 20.99%. Analysts suggest being neutral on this stock.
Apple Inc. (AAPL) recorded a trading volume of 45.389 million and a price rise of 0.55%. Analysts suggest buying this security.

Frequently Asked Questions (FAQs)

How does volume analysis differ between equity options and index options?

It focuses on individual stock contracts for equity options. Conversely, index options evaluate trading activity in options that are connected to market indexes, indicating general trends and mood in the market.

What is the volume analysis of options?

It is critical in options trading since it determines the demand and supply of the options contract for a particular security in the market. Thus, it aids investors and intraday traders in tracking the options trend and potential prices, and it also supports their trading strategies.

How to read volume analysis on Webull?

Traders and stock analysts often use Weibull Volume Analysis Application to make trading decisions. Generally, they consider four to five-volume indicators on Webull charts to interpret the stock or options trend and make informed decisions. For this purpose, they can go through the usual and classic analysts' ratings, which feature a report on the expected future performance of the respective security as per the experts.