How does volume affect stock price

By DK Aggarwal When there is a lot of activity and volume in the market, it produces volatility and big moves. However, it is always important to look at the relationship between volume and price. If a price move, up or down, is accompanied by higher volume, it tends to be more significant. Market fluctuations have high importance and influence on the decisions a trader takes.

One of the keys to success in stock trading is to understand how to make best use volume and price movement, as both can help trader know the liquidity level of a stock, and how easily can they get into or out of a position close to the current price, which can be a moving target.

The rise of fall of volumes shows a consistent change in market trend. The change in volumes suggests the effort and the price change is the result. This means, volume affects price movement depending on the market situation. Increased trading volume tends to lean heavily towards buy orders. On the flip side, if the trading volumes drop, it is an appropriate time to sell. Another fascinating point to note is that when the volumes go from low to high levels in a strong fashion in particular stocks, it signals strong buying.

Basically, when big money institutional players steps into the market, they leave a mark, as their orders tend to be big, the stock price zooms up and their footprints get visible. Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www. Read More News on trading volume Market price stock. Also, ETMarkets. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds.

Trading volume can help an investor identify momentum in a security and confirm a trend. If trading volume increases, prices generally move in the same direction. That is, if a security is continuing higher in an uptrend, the volume of the security should also increase and vice versa. An investor is interested in the company and wants to purchase 1, shares. They conduct a fundamental analysis of the company and see that its earnings and revenues have consistently increased over the past year.

However, the investor is not confident the stock will continue in this uptrend and is worried that the trend may reverse. In this example, trading volume analysis can be very useful.

The investor sees there was a steady increase in ABC's trading volume over the past month. They also notice that the trading volume was the highest that ABC stock had experienced over the past two years, and that the stock is continuing to trend higher.

This signals to the investor that ABC is gaining momentum and gives them confidence that the trend should continue higher. Thus, the increase in trading volume led the investor to purchase 1, shares of ABC stock.

Trading volume can also signal when an investor should take profits and sell a security due to low activity. If there is no relationship between the trading volume and the price of a security, this signals weakness in the current trend and a possible reversal. The investor sees that share prices of company ABC are still in an uptrend and continues to hold on to the shares. However, over the next few weeks, the stock continues in the uptrend. However, the trading volume is decreasing. Stocks that have relatively little trading volume can have spreads of a dime per share or more.

Why thinly traded stocks can take you for a bumpy ride Most of the time, the impact of trading volume is relatively neutral. Because the spreads between bid and ask prices are wider with thinly traded stocks, their prices will tend to move in a kneejerk manner, compared to the smoother movements among stocks with higher trading volumes. Where investors really see the difference, though, is when a company announces important news. With stocks with high trading volumes, you'll typically see a one-time jump or drop followed by relatively smooth trading thereafter, as the large number of investors following the stock can make rapid assessments of the impact of the new information.

With less frequently traded stocks, however, the swings can be much greater, and the stock price can overshoot and reverse itself several times as a relatively small number of investors fight to agree on an appropriate new price for the shares. Trading volume in itself doesn't affect stock price directly, but it does have a huge impact on the way that shares move.

Investors who look at thinly traded stocks need to be aware of the heightened volatility involved before they buy. To learn more about stocks and how to start investing, check out The Motley Fool's Broker Center and find the best broker for you. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular.

In short, while volume is not a precise tool, entry and exit signals can sometimes be identified by looking at price action , volume, and a volume indicator. Technical Analysis Basic Education. Advanced Technical Analysis Concepts. Actively scan device characteristics for identification.

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