Volumes – Varsity by Zerodha

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volume plays a very integral role in technical analysis as it helps us confirm trends and patterns. consider volumes as a means of gaining insight into how other participants perceive the market.


Reading: What is volume in stock market with example

volumes indicate how many shares are bought and sold during a given period of time. the more active the stock, the higher its volume. For example, you decide to buy 100 shares of Amara Raja batteries at 485, and I decide to sell 100 shares of Amara Raja batteries at 485. There is a price and quantity match, resulting in a trade. you and I together have created a volume of 100 shares. Many people tend to assume that volume counts as 200 (100 buys + 100 sells), which is not the correct way to look at volumes.

The following fictitious example should help you understand how volumes stack up on a typical trading day:

At 9:30 am, 400 shares were traded at a price of 62.20. an hour later, 500 shares were trading at 62.75. at 10:30 if you were to check the total volume for the day, it would be 900 (400 + 500). Likewise, at 11:30 am, 350 shares were traded at 63.10 and until 11:30 am the volume was 1,250 (400+500+350). etcetera, etcetera.

here is a screenshot of the live market highlighting the volumes of some of the stocks. the screenshot was taken around 2:55 p.m. m. from August 5, 2014.


if you look, the volume of cummins india limited is 12,72,737 shares. likewise, the volume of naukri (info edge india limited) is 85,427 shares.

The volume information you see here is the cumulative volume. which means that, at 2:55 p.m. m., a total of 12,72,737 cummins shares were traded at various price points ranging from 634.90 (low) to 689.85 (high).

with 35 minutes left until the markets close, it’s logical to expect volumes to pick up (assuming traders continue to trade the stock for the rest of the day). in fact, here’s another screenshot taken at 3:30 p.m. m. for the same set of actions with the volume highlighted.


As you can see, the volume of Cummins India Limited increased from 12,72,737 to 13,49,736. Therefore, for Cummins India, the volume for the day is 13,49,736 shares. Naukri volume has increased from 85,427 to 86,712, making 86,712 shares the volume of the day. you should note that the volumes shown here are cumulative.

12.1 – the volume trend table

volume information by itself is pretty useless. For example, we know that the volumes of Cummins India are 13,49,736 shares. so how useful is this information when read in isolation? if you think about it, it has no merit and therefore would not really mean anything. however, when you associate today’s volume information with the previous price and volume trend, the volume information becomes more meaningful.

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In the following table, you will find a summary of how to use the volume information:

The first line of the table above says that when the price increases along with an increase in volume, the expectation is bullish.

Before we understand the above table in detail, think about this: we are talking about an “increase in volume”. what does this really mean? what is the benchmark? should it be an increase over the previous day’s volume number or the previous week’s aggregate volume?

As a practice, traders often compare today’s volume to the average volume of the last 10 days. In general, the rule of thumb is as follows:

high volume = today’s volume > average volume of the last 10 days low volume = today’s volume < average volume of the last 10 days average volume = today’s volume = average volume of the last 10 days

To get the average of the last 10 days, all you need to do is draw a moving average line on the volume bars and the job is done. Of course, we’ll talk about moving averages in the next chapter.


In the chart above, you can see that the volumes are represented by blue bars (at the bottom of the chart). the red line superimposed on the volume bars indicates the 10-day average. As you’ll notice, all volume bars that are above the 10-day average can be thought of as increased volume where some institutional activity (or heavy participation) has taken place.

Keeping this in perspective, I suggest you look at the price and volume table now.

12.2 – the thought process behind the volume trend chart

When institutional investors buy or sell, they obviously don’t trade in small chunks. for example, think of the lic from india; They are one of the largest domestic institutional investors in India. if they bought shares of cummins india do you think they would buy 500 shares? obviously not, they would probably buy 500,000 shares or even more. if they bought 500,000 shares on the open market, it would start to show up in volumes. Furthermore, because they are buying a large number of shares, the share price also tends to go up. Institutional money is often referred to as “smart money.” it is perceived that “smart money” always makes more successful moves in the market than retail traders. therefore, following the smart money seems like a good idea.

If both price and volume are increasing, this only means one thing: a big player is showing interest in the action. Assuming that smart money always makes smart decisions, the expectation turns bullish and therefore one should look for buying opportunities in stocks.

or as a corollary, whenever you decide to buy, make sure the volumes are substantial. this means you are buying together with the smart money.

This is exactly what the first row in the volume trend chart indicates: the expectation turns bullish when both price and volume increase.

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What do you think happens when the price increases but the volume decreases as indicated in the second row?

Think of it in these terms:

  1. why is the price increasing?
    1. because market participants are buying
    1. unlikely
    1. Simple, if they were buying, then the volumes would have increased and not decreased.
    1. means the price is increasing due to small retail share and not really influential buying. so it would be helpful if you were cautious as this could be a potential bull trap.

    Going forward, says the 3rd row, a decrease in price coupled with an increase in volume establishes a bearish expectation. why do you think that?

    A decline in price indicates that market participants are selling the stock. increase in volumes indicates the presence of smart money. both events occurring together (decrease in price + increase in volumes) imply that smart money is selling shares. Assuming that smart money always makes smart decisions, the expectation is bearish and therefore one should look for short opportunities in stocks.

    or as a corollary, whenever you decide to sell, make sure the volumes are good. this means you are also selling, along with the smart money.

    In the future, what do you think happens when both volume and price decline as indicated in the fourth row?

    Think of it in these terms:

    1. why is the price going down?
      1. because market participants are selling.
      1. unlikely
      1. Simple, if they were selling, then the volume would increase and not decrease.
      1. means the price decreases due to small retail share and not really influential selling (read smart money). so it would be helpful if you were careful as it could be a potential bear trap.

      12.3 – checklist review

      Let’s go through the checklist and evaluate from a volume perspective. imagine this hypothetical technical situation in an action:

      1. the occurrence of a bullish engulfing pattern: this suggests a long trade for the reasons discussed above
      2. a support level around the bottom of the bullish engulfing: support indicates demand. therefore, the appearance of a bullish engulfing pattern near the support area suggests that there is indeed strong demand for the stock and therefore the trader may consider buying the stock.
        1. With a recognizable candlestick pattern and support near the stop-loss, the trader gets double confirmation to go long.

        Now, along with support near the bottom, imagine high volumes on the second day of the bullish engulfing pattern, ie at p2 (blue candle). what can you infer from this?

        The inference is pretty clear: high volumes and rising prices confirm that large, influential market participants are positioning themselves to buy the stock.

        with all three independent variables i.e. candlesticks, s&r and volumes, suggest taking the same action i.e. going long. if you realize this is a triple commit!

        I want to convey the fact that volumes are compelling as they help the trader to confirm a trade. for this reason, it is an important factor and therefore should be included in the checklist.

        This is what the updated checklist now looks like:

        1. the action should form a recognizable candlestick pattern
        2. s&r should confirm the trade. stoploss price should be around s&r
          1. for a long trade, the low of the pattern should be around support
          2. for a short trade, the high of the pattern should be around resistance
          1. Presence of above average volumes on both buy and sell days
          2. low volumes are not encouraging and so feel free to hesitate to make a operation where volumes are low

          chapter key points

          1. volumes are used to confirm a trend
          2. 100 shares bought and 100 shares sold total volume 100, not 200
          3. volumes at the end of the day indicate the accumulated volume on all trades executed throughout the day
          4. high volumes indicate the presence of smart money
          5. low volumes indicate retail participation
          6. when you start a trade to go long or short always make sure volumes are confirmed
          7. avoid trading on low volume days

          Category: Stocks

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