The Study Of Stock Market Through Technical Analysis

Lesson -> The concept of VOLUME

Technical analysis relies heavily on volume to confirm trends or patterns. Volumes can be used to gain insight into the market's perceptions by other participants.

Volumes are the number of shares that have been bought or sold in a given time period. Volume is a measure of how active a share is. You decide to purchase 100 shares at 485 and I decide that 100 shares at 485 will be sold. Trades are possible when the price and quantity match. Together, you and I have created 100 shares. Volume count is often equated with 200 (100 sells + 100 buys), but this is an incorrect way to view volumes.

S.NTimePurchase QuantitySelling QuantityRateVolumeCumulative Volume
019:30 AM40040062.20400400
0210.30 AM50050062.75500900
0311:30 AM35035063.103501,250
0412:30 PM15015063.501501,400
051:30 PM62562563.756252,025
062:30 PM47547564.204752,500
073:30 PM80080064.508003,300

This is a screenshot taken from the live market that highlights the volume for certain shares. This screenshot was taken at 2:55 pm on August 5, 2014, 5 th.400 shares were traded at 62.20 on 9:30 AM. 500 shares were traded at the price of 62.75 an hour later. If you wanted to see the total volume for that day at 10:30 AM, it would be 900 (400+500). 350 shares of 63.10 were also traded at 11:30AM, while up to 11:30 AM the volume was 1,250 (405+500+350). And so on.


Cummins India Limited has 12,72,737 shares.The volume on Naukri is 85,427 shares

This is the cumulative volume. At 2:55 PM, 12,72,737 Cummins shares were traded at different price points, from 634.90 (low), to 689.85(high).

There are still 35 minutes before the markets close so it makes sense to expect volumes to rise (assuming that traders trade the stock the rest of the day). Here's another screenshot at 3:30 PM of the same stock set with volume highlighted.

Cummins India Limited's volume has increased from 12,72 737 to 13,49 736. Cummins India's volume for the day now stands at 13,49,736 shares. Naukri's volume has increased from 85.427 to 86.712, resulting in 86.712 shares as the volume of the day. It is important to remember that these volumes are cumulative.

12.1 - Let.s understand the table of Volume Trends!!!

Volume information is useless by itself. We know for example that Cummins India volumes are 13,49,736 shares. This information is useless if it is taken in isolation. It has no value and would therefore be meaningless. Volume information is more meaningful when it's correlated with the volume trend and preceding price.

The table below shows you how volume information can be used.

S.N.RateVolume Expectation
01IncreasesDecreasesCaution – weak hands buying
03DecreasesDecreasesCaution – weak hands selling

The table's first line states that bullish expectations are made when prices rise along with volume.

Let's first understand the table. We are referring to an "increase in volume". What does this really mean? What is the reference level? What should the reference point be?

Traders often compare the volume of today with the volume for the past 10 days. The rule of thumb is generally:

High Volume = Today's volume is greater than the average volume for the last 10 days
The last 10 days average volume > Today's volume=low volume
Last 10 days value =today's volume=average volume

All you have to do in order to get the latest 10-day average is draw a line drawing of a moving average on the volume bars. Moving averages will be discussed in the next chapter.


The chart below shows that volume is represented by the blue bars at the bottom of this chart. The 10-day average is indicated by the red line that is placed over the volume bars. You can see that all volume bars which are higher than the 10-day average could be considered to indicate an increase in volume due to institutional activity or large participation.

To keep this in perspective, I suggest that you look at the volume-price table.

12.2 - Volume trend chart-The Conception

Institutional investors don't buy and sell in small amounts. Consider India's LIC, which is one of India's largest domestic institutional investors. Would you bet they would purchase 500 shares of Cummins India if they were to buy their shares? They would likely buy at least 500,000 shares. They would buy 500,000 shares on the open market and it would reflect in volume. A large share of the shares they buy tends to increase because it is a large amount. "Smart money" is often used to describe institutional money. According to some, smart money is more successful than retail traders in the market. Following smart money is a wise decision.

The stock is likely to be bought by a major player if both its price and volume increase. The expectation is bullish, as smart money makes smart decisions. Therefore, one should consider buying the stock.

As a side note, make sure that you buy large quantities whenever possible. This is a way to buy with smart money.

This is exactly what you want.1.The volume trend table shows that bullish expectations are made when volume and price increase.

What do you think happens if the price rises but the volume falls as shown in the 2nd rows what is the best way to get started?

Consider the following:

  1. Why is the price rising?
    1. Market participants buy because
  2. Is there an institutional buyer for the price rise?
    1. It is unlikely
  3. How do you know that institutional investors are not buying meaningfully?
    1. Simply put, if they were purchasing, then volumes would have increased rather than decreased.
  4. What does a price rise associated with decreasing volumes mean?
    1. This means that the price of the product is rising due to small retail participation, and not because of any significant buying. It would be wise to be cautious, as this could lead to a bull trap.

Moving forward, the Third row according to you, a decline in price and an increase in volume are both signs of a bearish outlook. What makes you believe so?

If the price drops, it means that stock market participants have sold the stock. An increase in volume indicates that there is smart money. Both of these events (decreased price and an increase in volume) indicate that smart money is buying stocks. Based on the assumption that smart money makes smart decisions, one should consider selling the stock.

As a side note, make sure that you sell in high volumes whenever possible. This is a sign that you are also selling along with the smart money.

What do you think will happen if both price and volume decrease as shown in the4 The RowWhat is the best way to get started?

Consider the following:

  1. Why is the price falling?
    1. Because the market participants are selling.
  2. Is there an institutional seller that is associated with the price drop?
    1. It is unlikely
  3. How do you know that institutional investors are not placing meaningful sell orders?
    1. Simply put, if they were actually selling, then volume would increase.
  4. How can you deduce a decrease in price and a decrease in volume?
    1. This means that the price drops because of smaller retail participation and is not as influential (read: smart money) selling. It would be wise to be cautious, as this could lead to a bear trap.

12.3 - Checklist - Short revision

Let's go back to the checklist and look at it from the standpoint of volume. This is how you might imagine the technical situation in a stock.

  1. A bullish engulfing signal - This suggests a long trade, as discussed previously
  2. Support levels around the low of bullish Engulfing indicate demand. The presence of bullish engulfing patterns near the support level suggests that there is a strong market for the stock. Therefore, traders can consider buying it.
    1. A trader who has a clearly identifiable candlestick pattern and supports near the stoploss will get a double confirmation that they are going long.

Assume high volumes at the 2 and 3 days of the bullish-engulfing pattern. On P2 (blue candle). What can you deduce from this?

It is clear that high volumes and an increase in price are signs that influential market players are positioning themselves to purchase the stock.

All three variables are independent, i.e. S&R, candlesticks, and volumes suggest the same action: to go long. This is a triple confirmation, you will see!

Volumes are important because they help the trader confirm a trade. It is therefore an important element and must be included on the checklist.

Here's the updated checklist:

  1. A recognizable pattern should be formed by the stock.
  2. S&R should confirm trade. Stoploss should be at least S&R
    1. The support should be at the bottom of a long trade.
    2. The resistance should be the support for a short trade.
  3. The volumes should be confirmed to the trade
    1. High volumes of both buy and sold days
    2. Low volumes aren't encouraging so don't hesitate to trade in low volumes.

Key points:

  1. To confirm a trend, volumes are used
  2. 100 shares buy, 100 shares sell the volume total 100. Not 200
  3. End of the day volumes indicate the total volume from all trades that were executed during the day.
  4. The presence of smart money is indicated by high volumes
  5. Retail participation is low when volumes are low
  6. Always confirm volumes before you open a trade that will go either long or short.
  7. Do not trade on days with low volumes