What is Trading Volumes? How they are important while trading stock market?
Title: Decoding Trading Volumes: An Underrated Tool for Stock Market Success
Introduction:
Understanding the stock market requires comprehending a multitude of elements, indicators, trends and terms used in the trading world. Today we’ll be diving deep into one of these crucial aspects – ‘Trading Volumes’, an oft-underrated but essential tool for making informed trading decisions.
## What Are Trading Volumes?
Trading Volumes represent the total number of individual shares changing hands between buyers and sellers over a specific period, typically over the course of a trading day. This can be easily seen on a stock’s chart as bars or histograms that run along the bottom of the chart.
As depicted in the image above, the height of each bar represents the trading volume for a particular period. Higher bars indicate more trading activity, whereas shorter bars indicate less.
Every time a trader purchases shares of a stock, it adds to the volume count. So, when you hear someone say, “XYZ company traded 1 million shares today,” they are referring to the trading volume.
## Why Are Trading Volumes Important?
### 1. Measure of Liquidity
Trading volumes provide a measure of liquidity or how easy it is to buy or sell a particular stock without causing a drastic price movement. Higher trading volumes mean there’s significant trader interest, and therefore, it’s easier to execute a trade quickly and at a competitive price.
### 2. Confirmation of Trend
Volumes can also serve as a confirmation of a trend. Typically, an uptrend for a stock is considered strong and potent if accompanied by high volumes, and the same goes for a downtrend.
For example, suppose a company’s shares start to rise on high volume. In such a case, this would generally be taken to mean that the uptrend is supported by a substantial amount of investor interest, thereby validating the trend.
As visible in the image above, the matching of an uptrend with a rise in volume confirms the bullish trend.
### 3. Spotting Reversals
Volumes can also aid in spotting possible reversals. Typically, a high volume spike (such as the one depicted below) suggests a point of market interest and could indicate a future reversal point.
### 4. Price Action Clues
Large volume often occurs at the beginning of new trends, at trend reversals, or when a stock is breaking through a technical resistance level. It can, therefore, serve as a useful predictor of future price action.
Conclusion:
To successfully navigate the stock market and make the most informed decisions, understanding the importance and implications of trading volumes is imperative. As we have seen, they provide invaluable insights into market trends, liquidity, and potential reversal points. They can serve as a helpful beacon in the vast and often tumultuous ocean that is stock trading. However, they should never be used in isolation and should always be considered alongside other indicators and market fundamentals.
