A breakout in trading volume of a particular stock can have a major impact on the share’s price. But high volumes alone are never the sole reason why a share price moves upward. Various other equally important factors also influence the share price. Price/Volume divergence is one such factor that influences the movement of share prices. It affects all the trading volume based stocks and hence traders must be very vigilant about this factor.
Trend line and volume patterns are the other factors that traders consider for price trend analysis. Both these trends are supposed to show the continuation of the trend. There are certain assumptions made in the trend analysis process. These assumptions are used to project the volumes which would suggest that a trend is about to end. Trend lines show the level of trading volume that was earlier seen and Volume patterns show the change in trading volume that was earlier seen.
Trend lines and volume analysis are the best tools for traders to understand the present trends. Volatility is one other parameter that is closely observed during trading volume analysis. It indicates the change in price during a specified period of time. High volatility means that the shares traded are highly active, whereas low volatility suggests that the shares traded are more settled. The higher the trading volume, the higher is the volatility.
Most of us follow the simple maxim, buy low and sell high. This is good advice as far as day trading is concerned. It is not practical to follow this maxim when there is a breakout in trading volume. In such cases, the trader needs to buy high, hold for some days and then sell. Traders can make money only if they buy low and sell high. If they buy high and sell lower, they will incur losses.
Most of us believe that market prices are driven by supply and demand forces. The prices of most commodities like oil, gold, silver, etc. rise with the growth of world economy. But, this is not how the volumes are determined. Although, it is easy to calculate future volumes but it becomes a tedious task to determine past and current market volumes.
Trend line and volume trend analysis are one of the most accurate and useful tools which are used by most of the investors today. The trend line is drawn so that it predicts the exact area where the investor can expect the market price move. There are several calculators on the internet which can be used for this purpose.