Investment volume

Volume in investing on the stock exchange

The volume - in addition to the price - is the basic data examined by the technical analysis. It shows the activity of investors on the market - the volume reflects the scale of activity of both buyers and sellers. Together with turnover and number of open positions (LOPs), it can help you to study trends and forecast future market behaviour.

What is a volume?

Volume is the number of shares, bonds, contracts or any other instruments that were the subject of a transaction during a given period. The most frequently presented volume is daily because the number of transactions per day is the most interesting for investors. Thus, if the volume amounted to 1000 shares, it means that on that day transactions were made for 1000 shares - the investors bought a total of 1000 shares and sold a total of 1000 shares.

Volume value is shown on the graph in the form of histogram - these are bars usually placed at the bottom, under the price chart.

Importance of volume

In technical analysis, the volume indicates the strength of the trend and confirms the importance of price formation. The high volume is confirmed by, among others puncture a given support or resistance, or breakthrough from the head and shoulder formation. It is also assumed that the growing volume confirms the growing trend on the market.

In an upward trend, the volume should increase as prices rise and fall during downward adjustments, while the downward trend should be the other way round - the volume increases when prices fall and the volume decreases during upward adjustments.

If the volume drops during the upward trend, it means that there are fewer and fewer buyers and the trend may soon end. Slightly different is during the downward trend, where this rule does not always work.

This is due to the fact that the reversal of the downward trend will only become a reality once the buyers have returned to the market. Their return will result in an increase in volume and a reversal of the trend. When there is no demand for an instrument, the downward trend will continue with a low volume - it is said that the market' slides under its own weight'.

Thus, the volume helps investors to find market returns. One more example can be presented here: the share of a given company increased by 5% after a longer decline. How to recognize whether it is only a correction or a reversal? In this case too, the volume will be helpful - if it is significantly larger, it may confirm the importance of such an increase.

Volume and turnover

When viewing data and reading information about the stock exchange, the investor may also meet with the concept of trading. It is worth to specify what turnover is and what is different from volume, because both terms are often confused with each other.

Turnover is the value of executed transactions, calculated as a product of the number of instruments traded and their price. It allows investors to learn how the participants' activity during the session has been developing in a valuable way.

For example: 10 shares were traded at USD 50 each - trading was USD 500. However, trading can also reach 500 USD when the owner changed 100 shares of 5 USD. As you can see, turnover should not be equated with volume, since trading can remain constant, while the volume in the examples quoted will be different (10 and 500 shares respectively). Nor should turnover between different values be compared. It should also be noted that the volume is given in units of financial instruments and trading in units of currency.

The way in which turnover is reported may also be difficult to interpret. Some services and stock exchanges publish unilaterally, others publish two-way turnover. What does it mean?

If only one side of the market is traded, for example only the value of the shares bought, this is a one-sided method. When simultaneous purchases and sales of instruments are taken into account, this is a two-way method. Example: 1000 shares were purchased at USD 5 each. Single-sided trading is USD 5,000, double-sided trading is USD 10,000. It follows that bilateral trading will always be twice as high as unilateral trading.