A generic term for the number of securities or contracts traded in a given period.

Author: Zezhao Fang
Zezhao Fang
Zezhao Fang
I hold a degree in Statistics from the University of Waterloo. As a graduate, my academic focus has equipped me with strong analytical and quantitative skills. While I currently do not have a specific profession or work experience, my education has honed my abilities in statistical analysis, data interpretation, and problem-solving. I am well-versed in various statistical methods and techniques, making me adept at deriving meaningful insights from data.
Reviewed By: Andy Yan
Andy Yan
Andy Yan
Investment Banking | Corporate Development

Before deciding to pursue his MBA, Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on M&A and IPO transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for Capital One and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an MBA candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

Last Updated:December 3, 2023

What Is Volume?

Volume is a generic term for the number of securities or contracts traded in a given period. It is an important indicator. When a significant headline does not influence the market, volume is a stochastic function independent of price. 

When there is a relatively significant rise or fall, the number of transactions suddenly becomes large. If the price is at a support point, a vast sale may be unable to knock it down, but as soon as there is a big buy, the price tends to rise immediately. 

The reverse is also true. So, by the change in the amount being traded and the distribution of price, you can roughly analyze the distribution of support/resistance.

Stock market volume is the number of transactions reached between the buyer and the seller of stock and is unilateral. 

For example, a stock with 100,000 shares traded for the day means buyers bought 100,000 shares while sellers sold 100,000 shares. 

It is generally not calculated bilaterally; for example, 100,000 shares bought plus 100,000 shares sold, totaling 200,000 shares. 

Volume merely reflects the number of transactions. It can be measured by the number of shares traded and the amount traded.

Understanding volume

In general, stocks with high trading amounts and rising prices trend to the upside. Conversely, bear markets usually result in low volume. This is also seen in stock consolidation phases

This term is an essential basis for judging the trend of a stock and provides a necessary basis for analyzing price action. Therefore, investors should pay close attention to stocks with odd numbers of fluctuations. 

The total lot is the total number of shares/contracts/etc. The current lot is the units of that asset that were just traded. The unit of volume is shares or lots, with one lot equalling 100 shares.

Volume in technical analysis

Before we get into volume's application in this field, we need to know what volume and technical analysis are. These two concepts are vital in understanding it in the technical analysis framework. 

Volume analysis examines the number of stocks or contracts traded in a given period. This analysis is one of the many factors that inform technical analysts' trading decisions. 

To determine the importance of changes in the price of a security, investors can analyze trends and price movements.

Technical analysis is the sum of methods for making trading decisions in stocks and all financial derivatives by studying market behavior (like price action) to determine market trends and profit from cyclical changes. 

The technical analysis considers that market behavior embraces and digests all information, that prices fluctuate in a trendy manner, and that history repeats itself.

Among investors, two indicators are popularly used. They are designed to incorporate volume into trading decisions using technical analysis.

Both the Positive Volume Index (PVI) and the Negative Volume Index (NVI) are based on the previous day's trading amount and the market price of a security.  

When PVI is adjusted, the number of trades for the day has increased compared to the previous day; when NVI is adjusted, the trading amount is lower than the number of transactions from the last day. 

These basic index calculations show how trading amounts affect prices.

Volume in trading

Volume is the number of transactions of a particular unit bought and sold during a specific period. 

It directly reflects market supply and demand; when demand exceeds supply, investors scramble to buy, and the price will naturally rise. Conversely, when demand exceeds supply, buyers are few, the amount of trades shrinks, and the stock price is bound to fall. 

A change in the number of trades reflects a shift in the market's popularity and determines possible future market trends.

Volume trading refers to extremely active market trading. It usually occurs at market turning points.

This type of trading represents a divergence of views between the long and short sides. On the one hand, some people are bearish and are selling, while others are bullish on the market's future by buying in large quantities.

The opposite of a contraction in trading is a highly light market with a release of the trading volume. It usually occurs during a period of trend acceleration. It represents a period when most people are very much in agreement about the late trend.

This type of market is further divided into two situations. One is very bearish on the market, resulting in only people selling, no one buying, and a contraction down. The second is very bullish, resulting in only people buying, no one selling, and shrinkage.

When the main force intends to pull up, trading volume is often very significant. Then, after a few days or weeks, the volume slowly grows, and the stock price slowly pushes higher. At this point, a mound-like pattern is formed on the recent price chart.

It is a regular market feature for prices to rise as the number of trades increases incrementally. Therefore, it indicates that prices will continue to grow in the future.

A sudden release of enormous trading volume can happen at any stage. A sudden release of volume in the middle of a rally usually indicates that the strength of multiple parties has been exhausted. It will be challenging for the market to continue rising.

Volume Analysis

Stock volume is a reflection of the popularity of the stock. The higher the number of trades, the more money moves and the more in-demand the asset is. Conversely, the lower the amount, the less attention the stock is getting. 

Investors analyze this mainly by looking at the changes in the red and green columns representing volume in conjunction with price action.

A green candle indicates that active buying is more significant than active selling during the period, representing a rise.

If the stock price shows increasingly long red bars at lower levels, the stock will be in a rebound phase. At this point, you can watch for further future pressure. You can hold the stock if it is far from the pressure level.

Suppose a green column at high levels is getting longer and longer. In that case, it means that the stock is actively traded but also indicates that many investors are selling the stock, so it should be analyzed in conjunction with the averages, pressure levels, etc.

The red bar indicates that: active selling is more remarkable than active buying on the same day or at this time, representing a decline.

If a red column is concise for a long time, the company's stock price currently has little attention, and the stock price may be consolidating or in a negative trend. On the other hand, if a high red column is getting bigger and bigger, the funds are leaving the market.

Correlation between the number of transactions and price change

The number of trades determines price changes. It is one of the primary sources of price change. However, many investors are not aware of the law of volume change. 

Price candle analysis can only read the market's language and understand the subtleties of stock price changes if combined with an analysis of the volume.

The number of trades is a core driver of price changes, and its status in real-world technical analysis is self-explanatory. 

During an actual trading day, only a handful of significant events related to the number of trades provide signals for short-term traders.

Concerning volume, there are generally four situations on the plate:

1. Flat price with increasing trading

The price is flat, and the number of trades is increasing, which is a substantial signal price. Therefore, stabilization should occur after a sustained decline/flat in stock price, ultimately leading to an increase. 

At this time, the positive (buy) column is significantly larger than the negative (sell) column, indicating that the bottom could be nearing due to the accumulation of upward momentum. 

Consequently, This is a signal of a strong force in the stock. As a result, some traders may choose to enter a long position and hold for the rise.

2. Increasing price and transactions

Rising prices and increasing transactions are a buy signal to follow actively.

Trading amounts continue to increase, and the stock price trend is also upward. This increase is the best short- and medium-term buy signal and the most common way to actively attack the long term.

Especially when the bottom area breaks through a critical neckline or another significant technical pressure level, there is a greater need for the price to rise and the number of trades to increase.

3. Increasing price with flat volume

The price is up, and the number of trades is flat, so you can continue to buy. The trading amount stays relatively equal, and the stock price continues to rise, allowing for timely and moderate participation. 

Generally speaking, a rise in stock price needs to have an increased number of trades as the cornerstone of the rise. Therefore, this phenomenon of stock price rising while the number of transactions maintains a relatively stable level can be said to be a particular case in the market.

4. Price increases and volume decreases

A rise in price and a decrease in the number of trades present a divergence phenomenon generally attracting special attention from traders. 

Trades decrease in occurrence while the stock price continues to rise. Therefore, the most appropriate decision is to continue holding. However, start to look for a good exit, as a reversal could occur soon.

At this time, the price is steadily pushing up. It is far from the start of a significant increase, thus why there is a divergence between the two metrics. 

Aggressive bullish investors can continue to participate, holding for further gains. However, it is essential to be cautious.

Volume FAQs

Researched and authored by Zezhao Fang | LinkedIn

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