What tells the real story in stock trading: price or trading volume? – Economic Times

Trading News
By DK Aggarwal

When there is a lot of activity and volume in the market, it produces volatility and big moves. However, it is always important to look at the relationship between volume and price. If a price move, up or down, is accompanied by higher volume, it tends to be more significant. Market fluctuations have high importance and influence on the decisions a trader takes. Volumes reflect traders’ actions in the marketplace, and as a result can be a very useful measure of market sentiment.

One of the keys to success in stock trading is to understand how to make best use volume and price movement, as both can help trader know the liquidity level of a stock, and how easily can they get into or out of a position close to the current price, which can be a moving target. The rise of fall of volumes shows a consistent change in market trend.

The change in volumes suggests the effort and the price change is the result. This means, volume affects price movement depending on the market situation. Increased trading volume tends to lean heavily towards buy orders. On the flip side, if the trading volumes drop, it is an appropriate time to sell. Another fascinating point to note is that when the volumes go from low to high levels in a strong fashion in particular stocks, it signals strong buying. Basically, when big money (institutional players) steps into the market, they leave a mark, as their orders tend to be big, the stock price zooms up and their footprints get visible.

So, volume analysis and understanding of price-volumes are important to both trading and investing. Looking at volume patterns over time can help get a sense of the strength or conviction behind the advances and declines in specific stocks and the entire market. However, volumes should be looked at relative to recent history.

Comparing today’s volume of that of 10 years back might provide irrelevant data. The more recent the data sets are, the more relevant they are likely to be.

That said, volume is not a precise tool; entry and exit signals can sometimes be identified by looking at price action and volume indicators. As price movements determine profits and losses, traders should keep a vigil on price movement too. Most traders formulate day-trading strategy based on price movements, and then add volume analysis to see if it improves performance.

Undoubtedly, volume goes with the trend. It shows how much conviction investors have in a trend. Volumes are typically seen as a confirmation tool. So, it may be hyperbolic to say price is just the facade, volume tells the story. One should understand that both are two different sides of the same coin and one should consider the both options while trading in any security.

DK-snip-100

Chairman and MD, SMC Investments and Advisors

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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