The development of electronic commerce has greatly expanded the capabilities of traders. They received quick access to information that was previously hidden for them. Obtaining data on the volume of transactions has become an invaluable source of such necessary information.
Volume is the most important factor, which most traders pay attention to first of all, since by the dynamics of volume one can understand the strength and significance of the price movement.
To properly evaluate and interpret information, it is necessary to know that there are several approaches to measuring and displaying market volume.
On US stock exchanges, the volume is the actual number of shares or contracts sold.
On the London Stock Exchange is another calculation – indicates the number of transactions. This is a less objective way to reflect exchange volumes, since the value of the transaction itself is not taken into account, but only the fact of its execution. The transaction can be for 100 shares, or for 1000 shares, or for 10,000 shares – this is not taken into account.
On the currency exchange , tick volume is used – the number of ticks per unit of time, tick – the change in price by one basic point. And although tick volume has nothing in common with real exchange volume, it rather accurately reflects market sentiment. The tick volume is also used intraday by traders who trade futures contracts, as the exchanges indicate the volumes of futures contracts for the day.
There are two driving factors in the market: supply and demand. It is the preponderance of one of them that determines in which direction the price will move. When there are more buyers, the price rises, if sellers prevail – the price decreases.
Extreme volumes may precede reversals. A rise or fall in price, not supported by volumes , does not receive further development and ends quickly. Lack of volumes is typical for low liquidity markets.
Analyzing the dynamics of volumes, one can quite accurately determine the price levels from which the new trend starts, or the movement is completed, or a reversal is planned, or to understand that there is no interest in the instrument at the moment.
Large volumes at a certain price level show that there is an accumulation of orders in this place. This level can be support or resistance. There may be pending buy / sell orders or protective stop orders.
The total preponderance of buy or sell orders determines the direction in which the price will move.
Since large orders are not always executed the first time, but are executed in parts, this can explain the return of the price to the level. Given this fact, the trader has the opportunity to enter the market with a minimum stop and a high probability of opening a deal at the very beginning of the trend.
Analysis of price and volume
Comparison of price and volume dynamics helps to assess the market situation and make a decision. Modern traders use different tools. This is a stock exchange, and a tape of prints, and vertical or horizontal graphics, cluster graphics. They have a different level of information content, one can argue about the sufficiency and objectivity of the information carried by any of the analysis tools. But trading is a very individual and creative business, although it is based on certain laws and rules, so each trader chooses what suits him.
Assessment of the market situation comes down to the main task – to understand the psychology of the players at the moment. The main role in the movement of prices is played by “big players”. Therefore, to understand where the interest of this category of participants is directed and to join it is the right decision. The basis of this approach is to identify sales or purchases of professional large traders and professionals who have greater access to quality information, and therefore a more objective assessment of the situation. Although there is always a risk that the panic moods of the “crowd” can at some point turn the tide in an undesirable direction for the “big money”.
Analysis and evaluation of the aggregate behavior of price and volume helps to understand the balance of power, for this you can use the usual histogram of volumes on the price chart. There are several typical situations.
At the same time increasing the volume and price. The probability of continuing price movement up is time for purchases. Large volume confirms the trend. If prices update their highs, and volumes also reach new highs, it is likely that prices will continue to move to new peaks.
Silver futures – price and volume growth.
The price is rising sharply, and the volumes are falling. Most likely, the market went to the top. It makes sense to close a deal to buy and look for an opportunity to sell.
Silver futures – the price continues to grow, volumes fall – the top is reached, a reversal is expected.
Prices collapsed on increased volume. Most likely, sales continue. If the market updates lows and volumes grow, then it is likely that the price will move to a new minimum.
Silver futures – lower prices on a growing volume.
A deeper approach to analyzing the market situation based on price and volume behavior is provided by the VSA strategy. The study of the dynamics in the phases of accumulation, trend and distribution allows you to see the mechanism and causes of the driving forces in the market.
What approach from those that are described in the article, you have already tried? What have you not yet implemented? Maybe it makes sense to plan for the coming months? And if you feel that you do not have enough knowledge to apply, we are happy to come to your aid. Open our free course and get acquainted with it. Leave your comments and good luck in the auction!