7 – M1L3 10 Volume V3

Besides the current price of a particular stock. Another metric that traders liked to keep an eye on is the number of shares that are being traded over a period of time known as volume. Often shown along the bottom of an OHLC chart. The sum of unit price times volume gives you a more accurate measure of the total amount of money moving around. Volume is also important because it can affect how sharply its price might rise or fall. Let’s take a look at an example. Acme Inc is trading at $100 per share. Several investors speculate that Acme is going to launch a new product and expecting the new product to increase Acme’s value significantly, they place large orders to buy a total of 100,000 shares. The action of buying the shares increases the apparent demand for the stock and consequently the price jumps to $120 per share. That is, someone actually buys the shares at $120. Why does it jump? Because there are more people who want to buy the stock than those who want to sell. So, the sellers can charge a premium and you bet they do. Let’s assume that over the next few days there aren’t any announcements and no significant new activity in Acme’s stock. Some shareholders want to pull out their money and invest in another opportunity they hear about. So the price begins to fall gradually. Noticing this trend other investors decide to sell the majority of shares they bought. So that they can make a profit while the price is still high. As expected, this results in a sharp drop in Acme’s stock price it comes down to $90 per share. If you’re monitoring the price and volume of Acme’s stock, you might have noticed the relationship between volume of transactions and price changes. In general, large volumes of buy orders tend to sharply increase the stock price and large volumes of sell orders make it fall. This is another signal that you can use to decide when to trade a given stock. It is also something to keep in mind if you’re a major investor and you trade in large volumes. Some hedge funds for instance will spread their transactions over multiple days, so that their own actions don’t end up affecting the price adversely. Note that the volume of transactions also varies throughout any trading day. This is something to be aware of if you want to use volume as a trading signal. Stocks that are of active interest will typically see a lot of training at the beginning of the day. Since that is when traders get to act on, all the new information gathered and analyzed since the previous day’s market close. This initial activity known as price discovery, helps buyers and sellers converge on a mutually acceptable market price for each stock. Then the volume falls to a lower level as typical daily trading activity resumes. Finally, towards the end of the trading day, activity tends to increase a little resulting in a higher volume. This can be due to several reasons including day traders who want to close out any open positions and funds that typically update their holdings at the end of the day. In fact, some traders who have decided to buy-sell particular stocks, may not want to risk waiting for the next day. Who knows what events might take place in the meantime and how they might affect prices. Volume carries a lot of information about a stock and is an often overlooked metric. High volume trade, is more likely to affect the price of a stock than a low volume trade. Therefore, volume is an important factor to consider within your trading strategy.

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