What is Trading Volume Analysis

What is Trading Volume Analysis

Trading Volume analysis is the study of a security's shares or contracts that have been traded within a specific time period. Technical analysts employ volume analysis as one of several elements that influence their online share trading choices. 

Investors can assess the importance of price fluctuations in an asset by examining volume patterns together with price changes. Volume analysis examines relative or absolute changes in an asset's trading volume to forecast future price movements. In online share trading you need to understand multiple ratios which include volume as one of the key factors on selecting an investment. 

Broader Perspective on Trading Volume Analysis 

Not just technical analysts but analysts in general employ volume analysis as one of the key metrics. It's crucial to comprehend the volume analysis if a stock trader has to invest in a company's shares. It is clear from the definition that the term "volume" in this context refers to the total number of shares traded each day. 

In a larger sense, volume analysis entails knowing the trading volume of the whole stock market in comparison to the volume of a single holding, therefore the comparison is insufficient. Share trading volume analysis is a technique used by traders and investors to analyze the volume of shares traded in a specific stock.

Volume patterns have a lot to say; for instance, sustained price and trading volume rises can indicate positive markets. This is a terrific indicator to buy when the prices are still cheap before they soar, allowing investors to make the most money possible.

Similarly to this, a sharp decline in share price and volume indicates negative sentiment and results in a low market; investors may use this information to exit holdings before they result in losses. 

A trend can also be followed by investors with uncertainty thanks to analysis. The investor may use the stop bar approach to orderly purchase more (if the price is going down) or sell more (if the price is going up) if there is a trading pattern that they are uncertain about during the volume analysis.

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Table of Content

  1. Broader Perspective on Trading Volume Analysis 
  2. Stock Trading Volume Analysis 
  3. Indicators of Volume
  4. Conclusion

Stock Trading Volume Analysis 

Stock trading volume analysis is a technique used to analyze the volume of shares traded in a specific stock. Volume is mostly used in combination with price analysis for three purposes: validating trends, identifying possible price reversals, and confirming price breakouts.  

Confirming Trends

A rise in volume reveals a stronger desire on the part of buyers and sellers to push the price up or down, accordingly. For instance, if the trend is upward and volume rises as the price rises, this indicates purchasing interest and is often indicative of future moves to the upside that are more substantial. 

Spotting Price Reversal 

A trader must recognize an exhaustion move in order to detect a price reversal. The term "exhaustion move" refers to a situation in which a specific stock advances with decreasing volume and reaches the apex of its prolonged rally with maximum volume, which is 5x–10x its average daily volume. This may portend the end of the present trend. 

Proof of Price Breakouts

Volumes might assist in confirming a breakthrough when a specific stock has strong support or resistance levels. If the breakout is accompanied by higher volumes, there may be a conviction of buyers if the price has had difficulty breaking through a particular resistance level. This breakthrough is probably real.

Indicators of Volume

Two well-known technical indicators were created with the purpose of assisting traders who consider trading volume analysis. Paul Dysart created both the Positive Volume Index (PVI) and Negative Volume Index (NVI) in the 1930s. 

The 1976 publication of Norman Fosback's "Stock Market Logic" book, which covered these indexes, contributed to their rise in popularity. 

Both the PVI and NVI are calculated using the market price of a securities and the volume of trading from the previous day. The PVI is modified when trade volume improves from the previous day.  

The NVI is modified when trade volume declines from the previous day. These straightforward index calculations demonstrate how volume affects price. PVI growth or decline indicates that large volumes are driving pricing adjustments. In contrast, when NVI rises or falls, prices are varying with minimal influence on volume. 

PVI is calculated by 

PVI =  PVIprevious + (((CPtoday - CPyesterday) / CPyesterday)* PVIprevious). 

Here,

PVI stands for Positive Volume Index here.

Positive Volume Index of the Prior Day (PVIprevious)

The closing price for today is CPtoday, while the closing price for yesterday is CPyesterday. 

The shift to a positive volume index indicates that large volumes are having an impact on pricing. This indicates that trading in high quantities, such as massive purchases and sales, is the cause of any increase or drop in PVI.

NVI is calculated by 

NVI = NVIprevious + (((CPtoday - CPyesterday) / CPyesterday) * NVIprevious). 

Here, 

NVI stands for negative volume index here.

NVIprevious stands for the day's prior negative volume index.

Closing Price today in CPtoday, while Closing Price yesterday is CPyesterday.

The decrease in the negative volume index indicates that fewer volumes are having an impact on pricing. This indicates that the trading or buying/selling of smaller amounts is what causes the volume to rise or decrease.

Conclusion

One crucial statistic that aids investors in comprehending the market movement from a wider angle is volume analysis. It is described as the number of trade transactions, including contracts and shares, during a given time frame.  

PVI (Positive Volume Index) and NVI (Negative Volume Index) are the two most common and commonly utilized volume indicators that support volume analysis. The positive volume indicator is intended to gauge how well or how much the trade volume has improved. The NVI is also used to gauge any detrimental effects or drops in trade volume.

Trading Volume Analysis FAQs

The trading volume analysis is defined as the number of trade exchanges such as shares and contracts during a specific time period.

By adding up the total number of shares or contracts exchanged during a certain time period, trading volume is determined. 

The definition of the Positive Volume Index is an indicator of an improvement or rise in trade volume. 

The negative volume index is used to gauge how negatively the trade volume has been affected or decreased. 

Trading volume analysis is best used in conjunction with other forms of analysis, such as technical analysis and fundamental analysis.