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How to Use Stock Volume to Improve Your Trading


In the world of the financial markets, we hear a lot about stock volume, but what exactly is it, and how can you as a trader use it as a way to improve your overall trading fortunes?

In this article, we will be looking to provide answers to the above, as well as the question of exactly what is volume in stocks, as well as casting an eye on some of the key features of volume trading. Read on to find out more.

What is Volume in Stocks?

Stock volume, also known as trading volume, is a measure of the number of shares of an asset or security that changes hands over a certain period of time, typically over the course of a day between the open and close.

It can be a useful way of tracking any significant changes in the market for technical analysts, especially as an indicator of market strength, because rising markets on increasing volume are typically viewed as being strong and healthy.

Volume is measured throughout the day, with data being reported frequently. Some estimates can be taken as often as once per hour, as well as at the end of the day. However, the actual volume data is published on the following day.

The Importance of Volume Trading

Volume trading patterns are a useful reference tool for investors as they can signal the strength behind advances and declines in specific stocks – and entire markets – over a particular amount of time.

It is an essential part of any stock type because it represents the interest in the trading activity of said shares. During a price move, the heavier the volume, the heavier the interest and the more significant the move, and vice versa.

Volume is one of the simplest and most effective technical analysis methods, when it comes to understanding which stocks are in play and correctly identifying which ones are likely to make the biggest moves.

Key Volume Trading Indicators

On-Balance Volume (OBV)

On-balance volume takes the form of an advanced technical analysis indicator, using volume flow to predict any changes that occur in the stock price. 

It is a simple, but effective indicator of momentum, demonstrating crowd sentiment, which, in turn, can predict a bullish or bearish outcome. It can also show divergences, for example, when a price rises but volume is increasing at a slower rate or even beginning to fall.

Klinger Oscillator

The Klinger oscillator is a tool developed by Stephen Klinger in 1997 to determine the long-term trend of money flow, while also remaining sensitive enough to detect short-term fluctuations.

It makes a comparison between the volume flowing through securities with the security’s price movements, before converting the result into an oscillator. It then shows the difference between two moving averages, which are based on more than price. 

Chaikin Money Flow

Named after its creator, Marc Chaikin, the Chaikin money flow oscillator measures the volume-weighted average of accumulation and distribution over a specified period, which tends to be 21 days.

It focuses on expanding volume when prices finish in the upper or lower portion of their daily range, before offering a value for the corresponding strength. It can be utilised as a short-term indicator, due to the fact that it oscillates, but it can also be used for tracking divergence.

Guidelines for Using Stock Volume

When analysing trading volume, it is useful to follow a set of guidelines that can help you to determine the weakness or strengths of a market move. While they do not hold true in all trading scenarios, see below a brief overview of some of the key guidelines for using volume.

Market Interest

A rising market should feature rising volume. In this situation, buyers require increasing numbers and greater enthusiasm, in order to keep pushing prices higher.

It is important to understand that a situation involving both an increasing price and decreasing volume should serve as a warning for a potential reversal. Moreover, a price increase or decrease on low volume is a weaker signal than if there is a rise or fall on large volume.

Breakouts vs False Breakouts

With regards to the initial breakout from a range or other chart pattern, a rise in volume is an indicator of strength in the move. 

On the flip side, when there is little change in volume or declining volume on a breakout, it indicates a lack of interest and means there is a higher probability for a false breakout.

Bullish Signals

Volume can be useful in terms of identifying bullish signs. For instance, imagine an occasion when the volume increases on a price decline, before the price then moves higher, followed by a move back lower. 

In this case, if the price doesn’t fall below the previous low when it is on the downtrend, and if the volume is diminished on the second decline, then investors will usually interpret this as a bullish sign.

Key Takeaways

Stock volume is an easy-to-understand and effective way to study trends, featuring various ways to employ it as a useful method. There are a number of basic guidelines that can be followed, while indicators based on volume can also be used to help in an investor’s decision-making process.

It gives traders the ability to assess market strength or weakness, as well as to check if volume is confirming a price move or signaling that a reversal might be on the cards in the near future. Volume is certainly not a precise tool, but it can sometimes allow for the identification of entry and exit signals.