Does Volume Trading Really Matter?

Volume trading is often a concept that even the most experienced investors in the stock market would overlook. It is a general view of the people investing in the market that volume is not that significant in deciding the trend of the market and hence they will not get any help regarding their strategies. This viewpoint about volume couldn’t be any more wrong. Volume, when combined with price, could tell you everything about the trends in a stock market and what is about to come. Compare the volume of the market with previous days and you will have enough information at hand to make your move.

What Exactly Is Volume?

Before you go into the details of trading volume you must understand what volume is all about. Volume is the telling of total activity within a stock market. Another way of putting it is saying that volume is the total number of trades taking place in the market during a given time period. It is important to know the concept of time in order to measure the volume. You must look at the trades taking place in the market during a specified time period in order to know whether the volume is increasing or decreasing.

How Not To Look At The Volume

New traders can look at the volume of the market in a way they are not supposed to. For example, they might see a surge in the buying and sharing of a particular stock on a particular day and assume that the volume is high. That’s really not the case with volume and that’s exactly how you don’t gauge the volume of the market. The right way to know whether the volume is increasing or decreasing is by comparing it with the volumes taking place on the previous days for the same stock. 

Does Volume Really Matter?

Volume trading definitely matters, especially when you are dealing with high volume trades. Firstly, there have to be millions of shares of the same company trading in the market in order to consider volume as a factor. There are penny stocks in the market that sell only a few thousand shares in the market on a daily basis and their volume doesn’t tell you much about their price movement. The simple thing to understand here is that volume tells you the liquidity of a stock in the market. Hence it indicates how viable the market is at any given moment.

You wouldn’t want to enter the market as a seller or buyer if there isn’t much going on. To make profits you have to look at the stocks that are liquid and whose price and volume movements are dynamic. You will know that buying and selling the shares of a highly liquid stock will not be a big problem. Furthermore, the price of a stock and its volume has a relationship. On most occasions, the upward or downward movement in the volume tells an upcoming change in the price of a particular stock.