HOW IMPORTANT IS TRADING VOLUME
For example, let a company ABC whose price increased by 10% over the last month and an investor is willing to buy 1000 shares of the company and hence conduct fundamental analysis to know about the stability of the company. He goes through earnings, revenues, and notices they have increased too. However, the investor is still in doubt whether a stock will continue the uptrend or will reverse. This is where analysis of trading volume becomes relevant. The investor notices how company’s volume has increased over the last month and the stock is continuing the uptrend as well. It may be the scenario in the analysis that this was the highest volume reached by the company in the last few years. This provides signals that company ABC is gaining momentum and trend is expected to continue higher which eventually provokes the investor to invest in company ABC and buy 1000 shares.
For example, let a company be ABC who has extended it uptrend for a further 5 months and increased by 70% in six months. Thus, the investor notices the uptrend in shares and keep onto those shares. However, in the next few weeks, there comes a fall in the volume but stock keeps going in the uptrend. This provides signals of a bullish trend in company ABC and will begin to lose momentum and may end soon. The subsequent week, shares of company ABC decrease by 10% in one trading day after being in an uptrend for six months. The stock breaks its uptrend and the volume remains on high concerning to its average daily trading volume. Thus the investor sells out of all the shares the next day due to the reversal of trend being confirmed because of high volume and fall in price.