What is Volume in the Stock Market? How to Analyse It?

Volume analysis is a crucial aspect of technical analysis that traders often overlook and misunderstand. In this article, we aim to clarify various misconceptions about volume in the stock market and provide a comprehensive overview of its use. We will discuss what volume is, its purpose, and how it can be used for trend confirmation. Additionally, we will explore the volume profile indicator, a powerful tool for understanding the behaviour of institutional traders. 

What is Volume?

Volume is the total number of shares bought and sold over a specific period. However, people mistake volume for the number of trades that happen. If there are 10 buyers and 10 sellers, and each buyer and seller exchange 10 shares, then the volume is 100. So volume is the number of shares exchanged and not the number of trades, transactions, buyers, or sellers. 

The number of sellers and buyers does not matter because for a trade to take place or a share to be transferred, there must be both a buyer and a seller, as they are the counterparties required for the transaction to occur.

Volumes can be of any time frame as it is measured over a period of time. The 5-minute volume indicates the number of shares exchanged within the 5 minutes. Similarly, a 1-month timeframe shows the number of shares transferred within the month.

The volume indicates the level of interest in a particular security. For example, if there is a huge increase in the volume of security in the 5-minute timeframe, it means that the interest in the particular security at that time has increased.

How to See Volume?

You can see the volume of a stock on your broker’s terminal and charts. The volume indicator displays the volume. 

If you go to the key stats section on the right side of the TradingView terminal, it shows the volume of the day and the average volume over the past 10 days.

To add the volume indicator to your chart in TradingView, go to the indicators menu on the top bar and add volume by searching on the search bar. 

Once you add the volume indicator, the volume bars will be displayed at the bottom of the chart, like in the below image.

If you hover the crosshair over any candle, the volume during that time period will be displayed on the top left side of the chart. Each volume bar corresponds to the candlestick above it. In the above example, each candle is of a 1-day timeframe and therefore each volume bar represents daily volume. If you change the timeframe to, say 5 minutes, each volume bar represents volume during 5-minute periods.

Why are Volume Bars Red & Green?

The colour of the volume bar depends on the colour of the candlestick. If the candlestick is red, then the corresponding volume bar will also be red.

A common misconception among beginners is that red volume bars indicate more sellers. A red volume bar only indicates that sellers are more active than buyers and as a result the price gets pushed down, making the candle red or bearish.

Uses of Volume in Stock Market

• Volume is one of the ‘fundamental truths’ about the market because it indicates the interest in the stock. A higher volume indicates a higher interest.
• Volume helps us confirm if trends and patterns are backed by the interest of the majority of market participants. For example, If a breakout is happening without volume, it could be seen as market participants not 'believing' in that move.
• Active traders generally prefer high volume when trading an instrument. When you are considering entering a trade, always check if there is enough volume in that security. If it is illiquid, you will face liquidity issues.

Using Volume for Trend Confirmation

Traders can use the above cheatsheet to confirm trends and patterns by incorporating volume analysis. To understand if the volume is increasing or decreasing, you can observe the volume bars and their size over a specific period. If the size of the current volume bar is higher than the previous bar.

Practical Application of Volume for Trading

1. You can use volume to confirm breakouts/breakdowns

• Helps to enter, exit, or remain in a trade.
• For example, if a breakout happens and there is an increase in volume, you can consider entering a long trade.

2. Use volume shocker screeners to find good stock trading opportunities.

• You can use platforms like Chartink to filter out stocks with high volume to find trading opportunities.
• Go to chartink.com and click on screeners.
• Search volume shocker in the search bar to find screeners that filter stocks with unusual volume.
• You can select stocks from the screened list to identify stocks with potential trading opportunities.

Volume Profile Indicator

A volume profile indicator shows the trading activity at different price levels over a period of time. 

• It reveals the significant price levels on the chart by showing the total volume traded at different price levels.
• A red line indicates the zone with the highest trading volume.
• Helps to gain an understanding of where significant volumes are being traded, giving them a clearer perspective on market activity and sentiment.

How to Access the Volume Profile Indicator?

• Select the fixed range volume profile tool from the prediction and measurement tools under the tools panel on the left side of the chart. 
• Since this indicator calculates data over a time period, we need to set a start and end time. This can be done by clicking on the chart to define the starting time and clicking again to define the ending time. 
• Once the start and end time is set, the indicator will display the data in the form of a histogram based on the volume at the particular price levels.

• In the above example, the data is measured from December 1, 2022 to January 31, 2023.
• The red line indicates that the highest number of transactions took place at ₹333.
• The histogram indicates the number of transactions at different price levels.

In conclusion, volume can help you assess the strength or conviction of buyers and sellers in determining a security’s price and thus volume analysis is one of the most useful tools in technical analysis. Always make sure to use volume analysis in combination with other analyses for better results!