Importance of trading volume to investors
Trading volume is an important technical indicator an investor uses to confirm a trend or trend reversal. Volume gives an investor an idea of the price action of a security and whether he should buy or sell the security. Trading volume can help an investor identify momentum in a stock and confirm a trend
Large institutional investors account for the bulk of all trading activity in the market. It is their enormous buying and selling power, not the trading of smaller individual investors that pushes a stock either up or down. So, the volume on a chart is essentially the trading activity of large investors.My Funda : Follow the funds
Trading volume indicates the number of shares traded in a security or an entire market during a given period of time. If you are looking only at the price changes in a stock, you will get to know only a part of the story. To get the full picture, you need to also ascertain the volume. This is necessary because you cannot tell how meaningful a price gain or price drop is until you see how much volume is behind it. It is something like being told over the phone that you got a leak in your kitchen pipes. You will be eager to know whether it is just a little trickle or a flood like situation. You would like to check the volume of water coming through that leak to gauge how serious it is. Same is the case with stocks. Checking the relative trading volume is the only way to get an accurate picture about what the price movement actually means.
Look for unusual volume when a stock breaks out of a base pattern or falls below a moving average line. But how do you know whether the stock is trading at an “unusual” volume? This can be determined if you compare the day’s volume with the stock’s average trading volume Big price gains on unusually heavy volume show that institutional investors are buying aggressively. It is also a bullish sign.
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