The quantity of security traded between buyers and sellers is referred to as volume. Volume can be assessed on a trade-by-trade basis, over a specific time period, or even over an entire market. We’ll define volume, demonstrate how to read it on a chart, and discuss how some investors use volume to validate trends in this video. Volume is measured in shares in the stock market. A share of stock signifies a portion of a company’s ownership, therefore the word share.
A share is a fundamental metric for describing the quantity of a stock or other security. The quantity of shares traded in a single transaction is referred to as volume. For instance, if a buyer buys 1000 shares of stock from a seller, the transaction’s total volume is 1000 shares. During the trading day, thousands of transactions like this take to occur.
All of these transactions are tracked by the volume indicator, which totals the number of shares moved over a specific time period. A histogram of the volume indication is normally presented at the bottom of a stock chart. The total volume traded for a specific time period is represented by each bar of the histogram. On a daily chart, for example, each bar of the volume histogram reflects the total volume traded that day. Each bar of the volume histogram indicates the total volume traded each minute if you’re looking at a very short-term chart, such as a 1-minute chart.
The volume is frequently averaged across time, especially over the daily period. This is referred to as the average daily volume. Some investors compare today’s volume to the average daily volume from the previous few days. Investors often calculate average daily volume over a period of 20 or 30 days, but any historical period can be used.
An investor can determine the veracity of a price change in security by comparing today’s total volume to the 20-day average, for example. Some technical analysts believe that price movements on higher-than-average volume are more reliable than price movements on lower-than-average volume. Some investors believe that a stock breaking above resistance on larger-than-average volume is confirmation and that the stock is more likely to continue upward. The assumption is that price rose as a result of a large number of investors buying, as seen by the higher-than-average volume.
As a result, higher-than-average volume conveys confidence and can aid in price confirmation. Price movements on lower-than-average volumes, on the other hand, are believed to be less believable since they lack the participation of a large number of investors.
Some investors may be sceptical of a break above resistance on lower-than-average volume, believing the break was false due to a lack of participation. Some investors define and apply volume in the futures market, in the same manner, they do in the stock market with stocks and other assets. The difference between futures and options is that a contract is the basic unit of a transaction. This is due to the fact that futures are a contract between a buyer and a seller.
Rather than focusing on the number of shares traded per trade or the average daily volume of shares traded, futures traders look at the number of contracts traded in each trade and the average daily volume of contracts traded. An example of a futures contract that follows the Nifty stock index is shown below. The Nifty e-mini is the name of this instrument, and it trades under the symbol NIFTY.
The daily volume for the NIFTY, as you can see, is identical to the stock examples we looked at before. The term contract is also used by investors to denote volume in the options market. However, unlike stocks and futures, volume is not used in options. Because options are dependent on underlying securities such as stocks, this is the case.
And the price movement of an underlying security, as well as the volume associated with it, has a greater impact than volume in an options contract. As a result, rather than utilising options volume to validate price movements, some options investors use volume in a unique way. They might limit their options trading to contracts with a high volume of trades on a regular basis. This could indicate that transaction costs are lower as a result of tighter bid/ask spreads.
It’s vital to keep in mind that volume in options isn’t usually used to validate trends in the underlying security. However, that is how it is used in stocks and futures, making the volume a crucial part of technical analysis. When a security’s price moves, the volume shows how many investors are involved. And the more people who participate, the more credible the movement becomes.