Importance Of Volume In Stock Trading

Importance of Volume

Why Volume? Volume is the second most valuable data after the price itself.

Large volume signifies that there is large number of market participants involved, including financial institutions. The last ones bring the highest turnover to the market, and if they are trading, it means the interest to the price at certain point and/or to the trend overall is high. Small volume tells that there are very little participants in the market, neither buyers no sellers have any significant interest in the price. In addition, no financial institutions will be involved, thus a market is going to be moved only by individual traders and so the move will be weak.

Volume and Trend

Volume helps to learn about the health of a trend.

An uptrend is strong and healthy if Volume increases as price moves with the trend and decreases when price goes counter trend (correction periods).

When price is going up and volume is decreasing, it tells traders that a trend is unlikely to continue. Price may still attempt to increase at a slower pace, but once sellers get the grip on it (which will be signified by an increase in volume on a down candle), the price will fall.

A downtrend is strong and healthy if volume increases as price moves lower and decreases when it begins retracing upwards.

When price is falling and volume is decreasing, the downtrend is unlikely to continue. Price will either continue to decrease, but at a slower pace or start to rise.

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