3 Rules for Trading Stock Volume Analysis
In this article, I am going to discuss 3 Rules for Trading Stock Volume Analysis. At the end of this article, you will understand the following.
- What is Volume in Trading
- Understanding Volume Analysis in Trading
- 3 fundamental rule of volume analysis
What does volume mean in trading?
Volume, or trading volume, is the amount (total number) of shares or contracts that was traded during a given period of time. Generally volume shows the interest of buyers and sellers. In above example volume clearly shows buyers more interested than sellers
Let me explain you
3 rules for volume analysis in trading
These are the 3 rules that based our volume analysis
- THE LAW OF SUPPLY AND DEMAND
- THE LAW OF CAUSE AND EFFECT
- 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 price will rise to meet this demand and conversely when supply is greater than demand then price will fall
4 fundamental principle of supply and demand
- Price = direction of trend
- Volume =strength of trend
- Price and volume confirms market direction
- 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 nothing. 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 in direct proportional to the cause other words as small amount of volume action will only result in small amount of price action. If the cause is large then the effect will be large vice a versa
Different types of cause 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) seen as the result (price), where validated and divergence comes to consider
How to trade with price and volume
- As discussed in multiple time frame analysis. define the nearest supply and demand zone
- Let the price comes to the zone and analyse the candle associate with volume at the zone
- See either reversal or continuous volume and price action
In the next article, I am going to discuss Volume Price Action Analysis in detail. Please watch the following video if you want to learn and understand Rules for Volume Analysis in Trading concept in a more better way.
Here, in this article, I try to explain the 3 Rules for Volume Analysis in Intraday Trading in detail. I hope you enjoy this article. Please join my Telegram Channel to learn more and clear your doubts. https://t.me/tradingwithsmartmoney.