Level: Beginner
This is a beginner level education blog, which means that this is a topic that is introductory and has been covered by our club long before. These should be review and an easy read. Intermediate level articles might contain content intriguing to officers, but not too advanced topics. Advanced blogs are reserved for Michael Trehan for now.
Volume is a powerful tool used by many technical analysts to measure other traders’ level of interest in a particular stock. In addition, it can be used to confirm trend continuations or reversals. It is calculated as follows:
Volume = Shares Traded / Time period
Now let’s further simplify some of the terms here.
- Shares Traded: The number of shares that were either bought or sold (it does not matter which you use, the number will be the same) throughout the time period
- Time Period: The amount of time being tracked (e.g. 1 hour, 1 day, 1 week)
For example, if 5,000,000 shares of ABC were sold over the week, then its average volume for each day would be 1,000,000. Keep in mind that the number of sellers must equal the number of buyers. If it does not, the price will move up or down until it does.
Technical analysts regularly use volume to determine the strength or weakness of a market move. As an example, one day XYZ shares increased considerably. If the volume for that day was high, it means that tons of buyers wanted the shares. This buying pressure created a strong uptrend which was difficult for bears to fight. However, if the volume was low, it means that buyers did not want ABC shares that badly. The only reason the stock moved up that day was because there were few sellers to keep the price down. This created a very weak trend which could easily be reversed if some sellers enter the market. With this in mind, several events can cause tremendous buying or selling pressure: an earnings report, a manufacturing recall, etc. This pressure then causes the volume to spike.
Many websites like FINVIZ and StockCharts automatically display the volume when a ticker is viewed. The volume appears as a bar chart at the bottom of the display. In addition, the volume bar will be either green or red, depending on the performance of the underlying stock that day.
-Ken Croker