Tuesday, December 27, 2011

importance of volume in trading - I


many traders give a lot of importance to volume.

i always paid minimal attention to volume.

my attitude towards this important parameter got a shot in the arm when i heard an interview of a veteran successful trader who too, like me, didn't give importance to volume.

still, hearts of hearts, i was not comfortable avoiding looking in the eyes of
"volume"

today, i finally decided to bite the bullet.
i spent some good hours studying the phenomenon called
"volume"

and here is the synopsis of what all i read or thought or discussed with my core circle.

--

if price is rising and you simultanousy see rise in volume

it doesn't mean that buyers are more than the sellers.

rather, for 10 trades, there have to be exactly 10 buyers and 10 sellers....always!

infact, as you know, rise in price means that the desperate buyers have found reluctant sellers......resulting in rise in price.

and rise in volume means that more buyers were bitten by the desperation at that price point.

as martin pring says, volume and price are two independent entities.

price can move with or without rise in volume.

lets take an example.

these days bananas cost 40 rupee a dozen in shimla.

not too long ago, they cost 20 rupees a dozen.

if today 2500 dozen bananas got transacted in the fruit market when price was 40/- a dozen

what would trade volume you expect the next day if the price falls to 35? 30? (assuming other factors remaining constant and desperation of banana comsumers remaining the same.)

well, obviously, you will expect more banana fans to be interested in buying at lesser rate.

what if the rate tomorrow falls to 25? 20?

well, the volume will shoot up!

it might shoot up to the same trade level as it was when the price was 20 a few days back!

afterall, 20 rupee was the latest "support" price of banana.

so, does this rise in price really indicate that the bottom fishing is taking place and the price of banana will rise from hereon?

not really, in my opinion.

trade volumes of banana rose at 20 because 20 rupee per dozen was the latest support price for the fruit.

in other words, the volume of desperate banana lovers just shot up at a perceived bargain price!

price can still fall and fall big!

having said that, volume still signifies some crucial things

1. the price-value perception of public.

2. expected behaviour of buyers at support and resistance

does volume shoot up indicate fii/dii/big player position change?

yes and no.

yes, because generally fii's/dii's trade big volumes.

no, because fii's are known to accumulate or distribute, not "buy" or "Sell".

the difference being the manner in which they sell or buy....the stealth!

the sudden spike may just be a big deal which had reached a "target" price.

fii's buy when it doesn't show.

fii's sell when it doesn't show.

the best time to sell or buy may be when the volume is low......





(to be continued in part 2)

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