Volume spikes in stock trading

When I trade in DSE which is a stock market,I heavily focus on Volume! I am not sure how we can successfully trade a stock without volume!!! Yes,we can. But we don’t need to…or,we ‘should’ not….

One the other hand,when I trade in Forex,I don’t use Volume in anyway. Trading in Forex doesn’t require volume analysis at all. It is all about price there!!

Why volume?

Clearly,It has more advantage than disadvantage!!

The most important advantage of it is: volume is a leading indicator. Not a lagging indicator. It indicates what happened in past,and what has just happened at present. And it is one of those indicators that clearly shows what is gonna happen in coming days in a stock! Unlike ‘moving averages’,volume shows the what the smart money is doing right now! And based on that,we can take better decisions….

There are two types of volume trade in stock market:

1. Volume spikes
2. Volume trend

I personally treat them separately and I mostly trade “volume spikes”….I rarely care about volume trend.

So,what is volume ‘trend’?

Well,it is easy! As the price goes up or down,volume also goes up and down. This is the ‘trend’ of the volume. As a general rule volume should go up or down as the price goes up or down. Volume trend is the totality of traded volume during a period of time.

In the following image,the arrows are showing volume trend.

 

And what is volume ‘spikes’?

Volume spikes happen independently of the trend. A sudden breakout in volume is volume spike! A spike/breakout in volume tells us that something significant has happened in the stock. The stock may go dry,volumeless for some days,then,suddenly there is a spike/breakout of volume from a specific level. If that happens,we need to check out the price and try to interpret what the heck just happened!!

If we see the chart below,after some dry volume,there is suddenly a burst of volume in the stock/sector. And that happened just at the bottom indicating ‘buyers’ are coming in.

Then,again,we can clearly see ‘huge spike’ of volume just at the top of the price level. This clearly indicates,no more buyers are left in this stock and smart money dumped their holds to the mango people…..

Volume spikes happened independently of the overall trend….We could have a couple of dry days,then,suddenly one significantly high volume day. Then,again dry days before the trend changes.

 

 

 

Bottom line: a sudden breakout/rise in volume tells us a trend change may be coming!!!

I feel,interpreting volume spikes is easier than all other techniques.

Now,here are some things that volume spike could indicate:

1. Volume spike indicates accumulation inside trading range! This is a crazy good and highly effective thing to observe in the market.

2. Volume spike indicates an overbought or oversold situation. Another very important one.

3. Volume spike indicates a breakout happened. Well,what can I say! In recent times,this has happened a lot in DSE!

4. Volume spike indicates that the underlying trend may continue…After a pullback,new buyers come in pushing the volume high.

 

I will elaborate these four things sometimes in future!!