What Is Volume Analysis?
Volume analysis is the examination of the number of shares or contracts of a security that have been traded in a given period. Volume analysis is used by technical analysts as one of many factors that inform their trading decisions. By analyzing trends in volume in conjunction with price movements, investors can determine the significance of changes in a security's price.
Key Takeaways
- Volume analysis involves examining relative or absolute changes in an asset's trading volume to make inferences about future price movements.
- Volume can be an indicator of market strength, as rising markets on increasing volume are typically viewed as strong and healthy. When prices fall on increasing volume, the trend is gathering strength to the downside.
- Various tools, such as the positive volume index (PVI) employ volume in technical analysis.
Understanding Volume Analysis
Volume analysis is done by all types of analysts following specific securities in the financial markets. Generally, volume refers to the number of shares transacted per day. Having an understanding of the entire market’s trading volume versus the volume of a single holding can be one important comparison that helps analysts to discern volume trends.
Oftentimes, high volumes of trading can infer a lot about investors’ outlook on a market or security. A significant price increase along with a significant volume increase, for example, could be a credible sign of a continued bullish trend or a bullish reversal. Adversely, a significant price decrease with a significant volume increase can point to a continued bearish trend or a bearish trend reversal.
In general, it can be important for technical analysts to include volume charts in daily charting diagrams. Volume charts are usually available below a standard candlestick graph. These charts will also usually display moving average trendlines.
Incorporating volume into a trading decision can help an investor to have a more balanced view of all the broad market factors that could be influencing a security’s price which helps an investor to make a more informed decision.
Volume Indicators
In technical analysis, there are two popular indicators designed specifically to support investors that incorporate volume into their trading decisions. The Positive Volume Index (PVI) and Negative Volume Index (NVI) were developed by Paul Dysart in the 1930s. These indexes increased in popularity in 1975 when they were discussed in a 1976 book titled "Stock Market Logic" by Norman Fosback.
The PVI and NVI are both based on the previous day’s trading volume and a security’s market price. When trading volume increases from the previous day the PVI is adjusted. When trading volume decreases from the previous day the NVI is adjusted. These basic index calculations show how volume is affecting price.
When PVI increases or decreases, it means that price changes are being driven by high volumes. Conversely, when NVI increases or decreases it means that prices are fluctuating with little effect from volume.
Calculating the Positive Volume Index
If current volume is greater than the previous day's volume:
PVI=PVIprevious+(CPyesterdayCPtoday−CPyesterday)∗PVIpreviouswhere:PVIprevious=ThepreviousPVICPtoday=Today’sclosingpriceCPprevious=Thepreviousclosingprice
If current volume is lower than the previous day's volume, PVI is unchanged.
Negative Volume Index
If the current volume is less than the previous day’s volume:
NVI=NVIprevious+(CPyesterdayCPtoday−CPyesterday)∗NVIpreviouswhere:NVIprevious=ThepreviousNVICPtoday=Today’sclosingpriceCPprevious=Thepreviousclosingprice
If the current volume is higher than the previous day's volume, NVI is unchanged. Many investors believe that noise trading is a significant factor in the Positive Volume Index. Therefore, the Negative Volume Index is often followed for its insight into professional traders' market activity.
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FAQs
What Is Volume Analysis? Volume analysis is the examination of the number of shares or contracts of a security that have been traded in a given period. Volume analysis is used by technical analysts as one of many factors that inform their trading decisions.
How is the volume indicator calculated? ›
What Is the Net Volume Indicator? Net volume is calculated by subtracting a stock's uptick in volume (the number of shares traded when the price is increasing) from its downtick in volume (the number of shares traded when the price is decreasing). The net volume is calculated over a specified period.
How do you calculate price volume analysis? ›
The basic idea here is to calculate the average revenue per unit. You take the sum of your revenue for the previous year. And then, you divide the quantity of products sold this year by the difference in the price of each product minus this average price.
What is the best way to explain volume? ›
In math, volume is the amount of space in a certain 3D object. For instance, a fish tank has 3 feet in length, 1 foot in width and two feet in height. To find the volume, you multiply length times width times height, which is 3x1x2, which equals six. So the volume of the fish tank is 6 cubic feet.
What is the easiest way to explain volume? ›
Volume refers to the amount of space the object takes up. In other words, volume is a measure of the size of an object, just like height and width are ways to describe size. If the object is hollow (in other words, empty), volume is the amount of water it can hold. Try this at home: Take a large cup and a small cup.
What is the formula for calculating spread? ›
You do this by subtracting the bid price from the ask price. For example, if you're trading GBP/USD at 1.3089/1.3091, the spread is calculated as 1.3091 – 1.3089, which is 0.0002 (2 pips). Spreads can either be wide (high) or tight (low) – the more pips derived from the above calculation, the wider the spread.
Which volume indicator is best? ›
The best volume indicator in forex is the On-Balance Volume indicator since it gives close to the most accurate feedback after testing significant highs and lows in the market.
How do you calculate value spread? ›
The average market-to-book of a portfolio is calculated as the sum of market values of all stocks divided by the sum of book values of all stocks in the portfolio. And the value spread is measured as the log book-to-market of decile ten minus the log book-to-market of decile one.
What does the volume indicator tell you? ›
Volume measures the number of shares traded in a stock or contracts traded in futures or options. Volume can indicate market strength, as rising markets on increasing volume are typically viewed as strong and healthy. When prices fall on increasing volume, the trend is gathering strength to the downside.
How to read a volume chart? ›
Volume Bars
Vertical bars in the volume area indicate the volume (i.e., number of shares traded) that day/week. As with the price bars, the color of the volume bar represents whether the stock closed up in price (blue) or down (red) for that trading period.
The Volume Summary contains a detailed breakdown of NYSE, NYSE American, NYSE Arca, NYSE National, and NYSE Chicago trading activity by share size, number of trades, short sales, odd-lot volume, VWAP, etc.
How do you calculate volume impact? ›
Volume Impact / Volume Variance Formula: (Actual Quantity - Average Historical Quantity) x Average Historical Price.
How to calculate volume variance? ›
The formula for production volume variance is as follows: Production volume variance = (actual units produced - budgeted production units) x budgeted overhead rate per unit.
What is the formula for selling volume? ›
Number of units sold x period of time = sales volume. To calculate sales volume variance, subtract your predicted sales in your sales forecast from your actual sales for a reporting period.
How do you read volume in trading view? ›
Volumes are displayed in the form of bars. The more bought and sold, the higher the bars on the indicator. How can I use volumes? ✅Volumes show large trades, which helps to understand the sentiment of the market (bullish or bearish).
What are the 4 methods used to find volume? ›
Introduction
- ρ = m/ V
- (i) volume by geometry.
- (ii) volume by water displacement.
- (iii) volume by pycnometry (mass-based)
- (i) the volume of a void inside a hollow cylinder; and,
- (ii) the percent composition of a mixed-metal cylinder.
- ( 2a ) V = π d. l = π d 2 l where d = diameter and l = length.
- ( 2b ) ρ = m. V. = 4m. πd 2 l.
Trading volume, which measures the number of shares traded during a particular time period, can help. While swings in trading volume may not be enough on their own to reveal changes in a trend, they can give you a sense of how much strength there is behind a move.
How do you read a volume graph? ›
Volume Bars
Vertical bars in the volume area indicate the volume (i.e., number of shares traded) that day/week. As with the price bars, the color of the volume bar represents whether the stock closed up in price (blue) or down (red) for that trading period.
