Volume Analysis in Trading

Back to: Trading with Smart Money

Volume Analysis in Trading

In this article, I am going to discuss 3 Rules for Stock Volume Analysis in Trading. Please read our previous article, where we discussed Opening Range Breakout Trading Strategy in detail. At the end of this article, you will understand the following pointers which are related to Volume Analysis in Trading. 

1. What is Volume in Trading?
2. What is Stock Volume Analysis in Trading?
3. Understanding Volume Analysis in Trading
4. 3 fundamental Rules of volume analysis

What does volume mean in trading?

Volume, or trading volume, is the amount (total number) of shares or contracts that were traded during a given period of time. Generally, the volume shows the interest of buyers and sellers. In the above example volume clearly shows buyers more interested than sellers. Let me explain to you

3 rules for Volume Analysis in Trading

These are the 3 rules that based on our volume analysis

1. THE LAW OF SUPPLY AND DEMAND
2. THE LAW OF CAUSE AND EFFECT
3. THE LAW OF EFFORT VS RESULT

These rules are popularly known as WYCKOFF BASIC LAW. Now let’s understand the 3 fundamental rules of RD Wyckoff

THE LAW OF SUPPLY AND DEMAND

When demand is greater than supply then the price will rise to meet this demand and conversely when supply is greater than demand then the price will fall. 4 fundamental principles of supply and demand

1. Price = direction of the trend
2. Volume =strength of the trend
3. Price and volume confirm the market direction
4. Divergence leads to market weakness

THE LAW OF CAUSE AND EFFECT

The law of cause and effect, basically, tells us that we cannot get something from anything. When the market enters a period where demand exceeds supply or, where there is an excess of supply over demand, it is not just a freak occurrence. Each of these comes out of a period of preparation and the extent of that preparation has a direct and inseparable effect on the final result. If there is no preparation, there will be no move.

THE LAW OF CAUSE AND EFFECT: The effect will be directly proportional to the cause other words a small amount of volume action will only result in a small amount of price action. If the cause is large then the effect will be large and vice versa

Different types of causes that occur are

• Trading range(accumulation/distribution)
• Chart pattern

THE LAW OF EFFORT VS RESULT

The market, or a stock, is continually attempting to go one way or the other. These attempts may be very short in duration or quite lengthy. Either way, they represent an effort generally expressed in terms of volume. When the price responds to the effort, an important price movement is likely. When the effort and result are contrary(divergence) in nature, there is likely to be an important change in the direction of the price.

THE LAW OF EFFORT VS RESULT: Similar to newton’s third law. Every action must have an equal and opposite reaction in other words the price action on the chart must reflect the volume action below. Effort (volume) is seen as the result (price), where validated and divergence come to consider

How to trade with price and volume

1. As discussed in multiple time frame analysis. define the nearest supply and demand zone
2. Let the price come to the zone and analyses the candle associated with volume at the zone
3. See either reversal or continuous volume and price action

Please watch the following video if you want to learn and understand the Volume Analysis in Trading concept in a better way.

In the next article, I am going to discuss Volume Price Action Analysis in detail. Here, in this article, I try to explain the 3 Rules for Volume Analysis in Intraday Trading in detail. I hope you enjoy this Volume Analysis in the Trading article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.