What do you need to know about trading volume?
Trading Volume and Market Volatility. What’s the Connection?
In a rising market, good volatility means that the majority of traders are confident that the growth is sustainable and the market is filled with liquid securities. Traders are ready to buy and hold their positions, while the mass entry provokes an increase in the price of securities.
A falling market is characterized by the opposite state, in which the price falls, and volume indicators grow. Most traders are confident that the market is collapsing, and they are trying to sell at a low enough price to have time to wind down their positions.
How are price and volume movements related on the stock exchange?
In order for volume trading on the exchange to be effective and bring income, rather than disappointment, it is worth realizing that volume does not form the price, but only follows it. Despite the fact that the price significantly outstrips the volume, it is not always the cause. Lack of volumes manifests itself when traders lose interest, but good indicators cause price fluctuations.
It is important to interpret the interaction of price and volume depending on the scenario, and here there are different options:
1). Bull market
volume increases, price rises This situation indicates that the trend is accepted by the majority of traders. Many traders want to enter the market, so they agree to give up more and more money. But if the volume increases too quickly and then sharply decreases, you should be careful - things are heading for a reversal. It is important to make sure that the price movement occurs against the background of not so large volumes that they begin to fall. This situation is typical for the top, when open positions are filled and there is no demand.
volume decreases, price decreases Decrease in volumes indicates that no one wants to sell, which most often foreshadows a possible rollback. Although in the midst of many bearish trends, volumes on the exchange sometimes increase slightly, before the reversal they practically dry up.
2). Bear market
trading volumes on the exchange decrease, price increases A drop in volumes is interpreted in some situations as indecision, but most often it foreshadows an impending reversal. A decrease in volumes entails a decrease in liquidity. An increase in price also indicates an impending reversal, since there are few buyers, and no new ones are expected. The best option here would be to close the position until the market decides.
trading volumes increase, price falls An increase in volumes indicates impending panic, for example, due to bad news. If, after a sudden acceleration of volumes and reaching an oversold market, volumes quickly decrease, a sharp reversal may occur, so you should be careful. Price declines on increasing volumes often occur in a rapidly falling market. In the middle of a downtrend, volume often increases slightly, and if it does not stop, it means that the market will continue to fall.
Reinforcement of reversal forecasts
Using technical analysis techniques, a trader can confirm forecasts regarding a trend reversal. The following factors can predict a change in the direction of movement:
bar structure – unusual indicators in combination with atypical volumes indicate an upcoming change; volumes on spikes – an indicator of typical “madness” that occurs due to an abnormally high number of orders that the market is simply unable to process at the current price; volumes on a narrowing market – indicate that the trader should exit the position and return to it again when the trend is determined. It is quite difficult to independently understand how to view the trading volume on the exchange and how to react in a specific situation. To clearly understand such issues, it is worth taking a systematic trading training, which is what SDG-Trade offers. Up-to-date knowledge and regular communication with professional traders will be an excellent impetus for successful activity. Get the necessary knowledge and achieve your goals with SDG-Trade!