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Stock Technical Analysis – Why Volumes are important?

Stock Technical Analysis Why Volumes are important?

The number of shares acquired and sold in a certain period of time is referred to as volume. The larger the volume, the more active the stock is. For example, suppose you decide to buy 100 Amara Raja Batteries shares for 485, and I decide to sell 100 Amara Raja Batteries shares at 485. There is a price and quantity match, resulting in a transaction. Together, you and I have generated a volume of 100 shares. Many people mistakenly believe that the volume count is 200 (100 buys + 100 sells), which is not the case. [br] The following hypothetical example should demonstrate how volumes accumulate on a normal trading day. [br]

Volume increases implies:

The anticipation is optimistic when the price rises in tandem with the increase in volume. Consider this before delving deeper into the table above. An increase in volume is what we’re talking about. What exactly does this imply? What is the point of reference? Should it be a higher number than the previous day’s volume or the prior week’s total volume? Traders typically compare today’s volume to the average of the previous 10 days’ volume. The following is a general rule of thumb:

High Volume = Today’s volume > last 10 days average volume
Low Volume = Today’s volume < last 10 days average volume
Average Volume = Today’s volume = last 10 days average volume

All you have to do to get the last 10-day average is draw a moving average line on the volume bars, and you’re done. Volumes are now represented by bars, as we can see (at the bottom of the chart in Tradingview). The 10-day average is indicated by the red line placed on the volume bars. As you can see, all of the volume bars that are over and beyond the 10-day average can be deemed higher volume, indicating that there has been some institutional action (or substantial involvement). Keeping this in mind, I recommend you take a look at the volume? The thought process that went into creating the volume trend table Institutional investors, on the other hand, do not buy or sell in small increments.

For example, think about LIC, they are one of India’s biggest domestic institutional investors. If they would buy shares of Cummins India, would you think they would buy 500 shares? Obviously not, they would probably buy 500,000 shares or even more. If they were to buy 500,000 shares from the open market, it would start reflecting in volumes. Besides, because they are buying a large chunk of shares, the share price also tends to go up. Usually, institutional money is referred to as smart money. It is perceived that smart money  always makes wiser moves in the market than retail traders. Hence following the smart money seems like a wise idea.

Volume increasing with increase in price.

It can only indicate one thing if both the price and the volume are rising. The stock has piqued the curiosity of a major investor. Based on the concept that clever money always makes wise decisions, the expectation becomes positive, and one should look for a stock to buy. As a corollary, anytime you decide to buy, make sure the quantities are large. This indicates that you are purchasing in lockstep with the smart money. Isn’t that what the first row of the volume trend table says? When both the price and the volume rise, the expectation shifts to the bullish side. What do you believe occurs if the price goes up but the volume goes down, as seen in the second row?

Volume increasing with increase in price.

Consider this: What’s the deal with the price hike?
Participants in the market are purchasing.
Is the price increase accompanied by any institutional buyers?
Probably not.
How would you know if institutional investors haven’t made a significant purchase?
Simply put, if they were buying, the volumes would have risen rather than fallen.
So, what does a rise in price accompanied by a drop in volume mean?
It indicates that the price is rising as a result of low retail activity and ineffective purchasing power. As a result, you should exercise caution because this could be a trap.


Volume increasing with decrease in price.

Why do you believe that? A drop in price suggests that the stock is being sold by market players. The existence of smart money is indicated by an increase in volume. When both events occur at the same time (price decline + volume increase), it indicates that the smart money is selling stocks. The expectation is bearish, and one should hunt for a selling opportunity in the stock based on the concept that wise money always makes sensible decisions. Alternatively, whenever you decide to sell, make sure the volumes are sufficient. This implies that you, like the smart money, are selling. What do you think will happen in the future if both volume and price fall, as seen in the fourth row?

Volume Decreasing with increase in price.

Consider it in the following terms: Why is the price going down?
Due to the fact that market participants are selling.
Is there a link between the price drop and any institutional sellers?
How would you know if institutional investors haven’t placed any major sell orders?
Simply put, if they were selling, the volume would rise rather than fall.
So, how would you deduce a drop in price from a drop in volume?
It implies that the price falls as a result of low retail participation and non-influential (read: smart money) selling. As a result, you should be cautious because this could be a bear trap.

Taking another look over it

Let’s go over it again and analyse it from the standpoint of volume. Consider the following hypothetical technical scenario in a stock:

why Is it possible for a bullish engulfing pattern to form? For the reasons stated previously, this indicates a long trade.
Is there a support level around the bullish engulfing low? Demand is indicated by the presence of support. As a result, the appearance of a bullish engulfing pattern around the support level indicates that there is certainly considerable demand for the stock, and the trader might consider buying it.

The trader gets double confirmation to go long with a recognizable candlestick pattern and support at the stoploss.

Consider significant volumes on the second day of the bullish engulfing pattern, i.e. on P2, in addition to support at the low.

What conclusions are you able to draw? Isn’t the implication obvious?

Large, powerful market participants are positioning themselves to buy the stock, as seen by significant volumes and a price increase. Candlesticks, S&R, and volumes all point to the same action, which is to go long. This is a triple confirmation, if you’ve noticed! I’d like to emphasise the importance of volumes because they assist traders in confirming trades. As a result, it is a critical component that must be considered while creating a entry or in some cases of reversal exit.