INSUBCONTINENT EXCLUSIVE:
We have already explained that technical analysts use price actions to arrive at the direction of a stock (ie whether the counter is in
uptrend, downtrend or sideways trend)
However, these price actions are not complete without volumes and therefore, volumes are also usually plotted in these charts, usually below
the price chart.
What is volumeTraded volume is defined as the number of shares or contracts traded in a counter during a given time period
Hence, the volume chart is plotted depending on the time period selected
For example, hourly chart will carry the total volume traded in an hour, daily chart will reflect the volume during the day, weekly chart
will show the entire week’s volume, etc.
Volume vs valueTraded value is calculated by multiplying volume with share price
Since most traders use shortterm charts, using volume or value won’t make much difference
However, value gives clearer picture if you are using long-term charts
If you look at the Asian Paints chart, you will realise that the traded value has multiplied over the years, though the traded volume
Another advantage of value is that it automatically takes care of events such as a split or bonus in the counter
For example, assume that the price of a stock fell from Rs 100 to Rs 50 after 1:1 bonus
Since the price has halved, people may buy double number of shares and therefore, an increase of volume from 1 lakh shared a day to 2 lakh a
day should be treated as normal
Traded value will remain same in the above example (ie 1 cr)
However, this will ‘show as a jump’ in volume charts.
Use in fundamental analysisVolume is important for all market participants
This is because it is very easy to manipulate a counter with very little traded volume (popularly known as an illiquid counter)
Long-term investors, especially institutional investors like mutual funds, usually avoid stocks that don’t have sufficient traded
volume.
Use in technical analysisSince technical analysis tools are designed to measure the mass psychology of participants, it can work
only if the stock has a large number of investors
That means before trading in any stock, investors need to make sure that the trading volume is sufficiently high.
Use average volumeUnlike
stock prices, volume can move up and down drastically within a short time period
While the traded volume in a counter is only a few thousand shares on a particular day, the volume can be in lakh on some other day
By using the average, say 10 day average, investors can get a fair idea about the liquidity of the counter
Please note that the 10 day average is relatively stable in both volume and value charts.
