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Role Of Volume In Stock Market by patric iawell
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Role Of Volume In Stock Market |
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Finance & Investment
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If quantity and price are the fundamental building blocks of any theory of market interactions, the significance of trading volume in understanding behavior of financial markets is clear. Nonetheless, while most economic models of financial markets have been developed for explaining price behavior – information content, predictability and variability – far less attention has been devoted to explaining trading volume behavior. In this article, we hope to expand our knowledge of trading volume by creating well-articulated economic models of asset volume and prices. Volume of stock is a number of shares, which are traded in stock exchange within given time frame. Volume plays a vital role in purchasing and selling of shares. Actually, it is the 2nd most important parameter for judging the potential of stock after price level. Most traders combine volume with price of a share to take purchasing and selling decision. So, let’s see why volume of share is so important in judging the stock potential. Volume unveils numbers of stocks traded in the share market. Traders compare volume of stock on a particular day with average trading volume for that particular share. For instance, if the price of a share has broken an upper limit and risen to a significant level, it is in general thought that stock will rise further. However, the stock volume is way too lower as compared to average trading volume, meaning the share can’t go further up. Particularly, the bigger buyers such as financial organizations, mutual funds and foreign investors don’t trade in that stock. Higher the volume, more active the share. The data regarding share volume is readily available on your online trading screen. Most financial websites carry data about volume. For instance, if stock volume for a day is 1500,000, which means 1500,000 shares were bought by someone and sold by someone on that day. As such, volume might not be the attractive piece of information. However, try to combine volume data with resistance and support levels; you will get the real image. It is also important to understand volume correctly, as it helps understand price moves and thus minimize losses and maximize gains. Besides normal volume measurements, investors also look at volume by price that’s basically shown as vertical histogram. This kind of chart shows number of shares trading at different price increments, offering insight into the resistance and support levels, which tend to trigger the most selling and buying. Fusing volume and price in a single chart, volume by price is a powerful tool, which illustrates how professionals use internal market data for planning profitable trades. It’s true when the price of stock is falling; the volume is lower than the average. Thus, it is wise to compare trading volume together with price level for deciding whether to purchase a share or not.
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