Trading Volumes Demystified !!

Significance of Trading Volumes !!

Volume is nothing but total number of trades completed during a specific time interval.  It is a good indicator for 'Level of Liquidity' in a stock. Higher the volume  in  a stock, It is considered to  be an  'Active'  stock. Active stocks do have a better liquidity than low volume stocks. Volume information studied as an independent scalar quantities does not have much significance. But if the movement of volume is tracked along with an other chosen data point such as stock price as a time series data, over a specified period of time at regular intervals, It helps to identify the strength of the prevailing trend and detect any red flags.

General theory is that if Price and volume moves in same direction, Trend continues in same direction or else it indicates a warning for Trend reversal. 

Relationship b/w Volume and Stock Price Movement 

Demand and supply concept prevails in most of the scenario. Price continues to rise  when Buyers exceed the number of sellers and volume is also increasing, It indicates that Bullish Trend is likely to continue. However, Reverse is also valid, stock price keeps on falling if more traders want to sell shares than who are interested to buy. Decreasing price with high volume indicates a Bearish Trend. 

               What is the significance of 'Low volume' at Top and Bottom levels ??

Institutional investors or more common term used is for them is 'Smart money', they behaves much like FIFO method. As they have a professional management and set of guidelines and research backed data to arrive at fair value of stock. They tend to exit at higher levels. Retail investor jumps into the prevailing sentiments and buys in relatively smaller lots that results in low volumes at higher levels. Trend reversal eventually takes place when no more buyers at willing to buy it at higher prices.

Also Read : Auto-updated Equity Stocks Portfolio in Google Sheets

In Downward trend,  It is just the same story but other way around, Heavy selling is triggered by the institutional players that sometimes takes a huge momentum leadin to 'Panic selling'.

In general terms, 'Low Volume' itself is an warning or indicator for volatility ahead, due to lack of interest in the market to follow trend anymore. There is high probability for a Trend Reversal at this stage, if the price is trading near crucial Support/Resistance levels. 

However, if a stock abruptly breaks the support or resistance with high volume, Trend is likely to continue in same direction.

Lets put it, simple 
Increasing/Decreasing volume movement has 4 Trading Scenarios with Up/Down price movement. 
Price                               Volume                               Significance                               
Increasing                       Increasing                             Bullish  Trend

Increasing                       Decreasing                           Warning - Possible Trend Revera

Decreasing                     Increasing                             Bearish Trend

Decreasing                     Decreasing                           Warning - Possible Trend Revera

Daily Stock Screener for Decreasing Price with Decreasing volume : See it Here.