Explain the relationship between volume and stock price movement

Trading volume: What it reveals about the market - danunah.info Business

explain the relationship between volume and stock price movement

Trading volume, or volume, is the number of shares or contracts that indicates Volume gives an investor an idea of the price action of a security and If there is no relationship between the trading volume and the price of a. Most theoretical models are unable to explain both price-volume relations,7 but [54], who attempted to model the stock price change as a diffusion process. Market makers buy at BID and sell at ASK. Where as market participants have to BUY at ASK and sell at BID. So the spread between BID and ASK guarantees a.

A trader can't live or die by any one indicator. But understanding volume can provide insight into a stock's behavior to help you determine its overall health. The most important rule is this: Typically, before a stock price moves, volume comes into play. The beauty of this indicator is its flexibility. Changes in volume can be used intra-day to determine short-term price movement or over several days to determine a stock's two to three day trend direction.

Trading volume: What it reveals about the market

Before learning how to interpret volume, you have to know what is calculated. The first step is to identify a stock's typical trading range.

explain the relationship between volume and stock price movement

Active traders were once relegated to writing down the volumes each day for their favorite stocks and then calculating the averages themselves. Now, of course, the Internet has made such information available to any investor online. Free data is available from hundreds of sites like Yahoo Finance. It will give you the average volume on any stock you choose.

In general, a price change on relatively low volume for a particular stock suggests an aberration, whereas a price change on high volume portends a genuine trend reversal.

How Volume Affects & Plays a Role in Stock Prices

An active trader looks at volume to determine a price trend and the obvious goal is to trade in the direction of the major price trend. One of the best times to buy is when a stock is going down on low volume with no news as compared to recent increases on higher volume. This suggests that the selling is lighter and that the holders of the stock that are going to sell have finished selling and the rest are holding.

The sellers of the stocks then may come back into the market when they see the price stabilize. It's also not a bad idea to sell on high volume on the way up if the volume appears to be tapering offas this usually creates abnormally high prices that cannot be maintained very long. There are other ways to use volume to your advantage. Traders should also calculate on-balance volume OBVthe relation between the number of shares traded and the price and trend of a stock, to portray whether price movement is coming from sellers or buyers.

Unfortunately, I haven't been able to find a Web site that calculates this so you may have to do it by hand if you do not have charting software. Here's one way to do it.

explain the relationship between volume and stock price movement

What volume reveals about the market's strength High volume means greater reliance can be placed on the movement in price than if there was low volume, because heavy volume is the relative consensus of a large number of participants.

High volume indicates an active market; in an active market, the spread between bid and asked prices is usually narrower. High volume is often characteristic of the initial stage in a new trend, such as a breakout in a trading range.

Using Volume To Predict Price Movement

Before a market bottom, investor nervousness leads to panic selling, a characteristic of which is high volume. High volume is also attributable to a market top when strong buyer interest exists.

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Low volume often exists during an unsettled period, such as at a market bottom. Low volume reflects a lack of confidence that is usually indicative of a consolidation period when prices are within a sideways trading range.

A sizable increase in volume may point to a breakout start or climax culmination of a move, which may be temporary or final. In a rare case, it may represent a shakeout. Volume typically follows a trend, expanding on rallies and decreasing on reactions.

Volume is useful in ascertaining how strong a change in expectations really is. How volume and price moves reveal the market's trend It is important to look at the relationship between volume and price.

A price move, up or down, that is on higher volume is more significant. Therefore, an analysis of price and volume allows the investor to better interpret the trends in price and any changes thereto.