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Using Trading Volume to Understand Investment Activity

Transacting volume, or volume, is the number of shares or contracts that indicates the inclusive activity of a security or market for a given period. Trading volume is an consequential technical indicator an investor uses to confirm a trend or trend repeal. Volume gives an investor an idea of the price action of a security and whether they should buy or shop-girl the security.

Identifying Momentum

Trading volume can help an investor label momentum in a stock and confirm a trend. If trading volume increases, costs generally move in the same direction. That is, if a security is continuing ear-splitting in an uptrend, the volume of the security should also increase and vice versa.

For lesson, suppose company ABC increased in price by 10% over the past month. An investor is engrossed in the company and wants to purchase 1,000 shares. They conduct principal analysis of the company and sees its earnings and revenues have consistently burgeoned over the past year. However, the investor is not confident the stock hand down continue in this uptrend and may reverse.

This is where trading capacity analysis comes in handy. The investor sees there was a steady extension in volume over the past month. They also realize it was the richest volume company ABC experienced over the past two years, and the stock is persist in in the uptrend. This signals to the investor that company ABC is gaining push and the trend should continue higher. The increase in volume causes the investor to win 1,000 shares of company ABC.

Low Activity

Trading volume can also signal when an investor should take up profits and sell a security due to low activity. If there is no relationship between the swap volume and the price of a security, this signals weakness in the current rage and a possible reversal.

Suppose company ABC extended its uptrend for another five months and expanded by 70% in six months. The investor sees that share prices of callers ABC are still in an uptrend and continues to hold on to the shares. However, over the next few weeks, the extraction continues in the uptrend but with a decrease in volume. This signals to the investor the bullish uptrend in performers ABC is beginning to lose momentum and may soon end.

The following week, shares of corporation ABC decrease by 10% in one trading day after being in an uptrend for six months. The wares breaks its uptrend and the volume is very high relative to its average everyday trading volume, or ADTV. The investor sells out of all the shares the next day because the rescission of trend was confirmed due to the high volume and a decrease in price.

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