What is Volume in Technical Analysis?
In the stock market, trading volume (Volume) refers to the number of shares bought and sold during a specific period. Volume is an important indicator in technical analysis because it helps us understand market activity and investor sentiment. When trading volume increases, it usually indicates that more investors are actively trading. Conversely, when trading volume decreases, it suggests lower market participation.
Changes in Volume and Their Significance
High Volume:
High Volume on Price Increases: When stock prices rise accompanied by high volume, this is generally considered a strong signal indicating robust buying pressure and high investor confidence in the stock. In this case, the stock price may continue to rise as more investors are willing to buy.
High Volume on Price Decreases: When stock prices fall with high volume, this is a weak signal, indicating strong selling pressure as many investors are offloading their shares. This may suggest that the stock price could further decline.
Low Volume:
Low Volume on Price Increases: When stock prices rise but trading volume is low, this could indicate a lack of confidence in the stock's rise, or that only a few buyers are pushing the price up. This type of increase is usually not seen as a strong signal because it may lack sustainability.
Low Volume on Price Decreases: When stock prices fall with low volume, it indicates that there are not many sellers in the market, and it may just be a small correction. This type of decline is generally not considered the start of a large-scale sell-off, and the stock price may soon stabilize.
The Impact of Volume on the Overall Market
The overall market refers to the general performance of the entire stock market, such as Taiwan's TAIEX (Taiwan Stock Exchange Weighted Index) or the U.S. S&P 500 Index. The impact of trading volume on the overall market primarily reflects market participation and investor sentiment:
High Volume Market:
When overall market volume increases, it usually indicates that investors are paying close attention to market trends, whether driven by optimistic bullish sentiment or pessimistic bearish sentiment.
High Volume in a Bull Market: In a bull market (a rising market), high volume typically indicates strong market confidence, with many investors actively participating, which further drives the market higher.
High Volume in a Bear Market: In a bear market (a declining market), high volume might indicate panic selling, with investors rushing to sell off their assets, potentially leading to further market declines.
Low Volume Market:
When overall market volume decreases, it usually suggests that investors are uncertain about future market trends or are waiting for clearer market signals.
Low Volume in a Bull Market: In a bull market, if volume starts to decrease, this may indicate that the momentum of the uptrend is weakening, and the market may be preparing to enter a correction or consolidation phase.
Low Volume in a Bear Market: In a bear market, low volume may indicate reduced selling pressure, suggesting that the market sell-off is nearing its end and could be ready for a bottoming-out rebound.
The Impact of Volume on Individual Stocks
Volume also significantly impacts individual stocks, as it can reveal market interest and sentiment toward a particular stock:
High Volume in Individual Stocks:
When a stock's volume suddenly increases, it typically indicates that certain events have caught investors' widespread attention. These events could be positive (such as good news from the company or strong earnings reports) or negative (such as scandals or profit warnings).
High Volume on Price Increases: If high volume accompanies a rise in stock price, this is generally a bullish signal, indicating high market interest and confidence in the stock.
High Volume on Price Decreases: If high volume accompanies a drop in stock price, this is generally a bearish signal, suggesting that many investors are pessimistic about the stock's future, and it may fall further.
Low Volume in Individual Stocks:
When a stock's volume is relatively low, it indicates low market interest in the stock, and price movements may be insignificant.
Low Volume on Price Increases or Decreases: If the stock price rises or falls with low volume, this may indicate that these movements lack solid support and may not necessarily indicate the start or end of a trend.
How to Use Volume for Investment Decisions
For beginner investors, understanding volume changes can help you better gauge market conditions and individual stock performance:
Confirm Trends: When considering buying or selling, check whether the volume supports the current price trend. For example, if you see a stock price rising with increasing volume, this could be a strong buy signal.
Identify Potential Reversals: When a stock price continues to rise but volume begins to decrease, this may indicate an impending trend reversal. Similarly, when a stock price falls with decreasing volume, this could suggest weakening selling pressure and a potential rebound.
Prevent Misjudgment: Do not rely solely on volume to make investment decisions. Combining volume with other technical indicators (such as RSI, MACD) can improve the accuracy of your judgments.
The Relationship Between Volume and News
In addition to technical indicators, news is another crucial factor that affects trading volume. News refers to information about a specific company or the entire economy, including earnings reports, economic data releases, policy changes, and major events. This news can be positive (bullish) or negative (bearish), and their impact on volume usually reflects investor reactions to these news items.
How News Affects Trading Volume
Positive News Exhaustion:
When a stock continuously releases positive news (such as higher-than-expected revenue or profit growth), these bullish news items attract many buyers, leading to increased volume and rising stock prices. However, when all the good news has been fully absorbed by the market and there are no new positive catalysts, the market may start to lack new buying momentum.
Impact of Positive News Exhaustion: In this case, volume may begin to decrease as most optimistic investors have already entered the market, leaving fewer buyers. At this point, the stock price may begin to consolidate or pull back due to insufficient buying pressure to push the price higher.
Example: A tech company has reported strong quarterly earnings for several consecutive quarters, leading to a steady increase in its stock price and volume. However, when the latest earnings report comes out, the results are good but merely meet high market expectations. Investors may feel there won't be any further positive surprises in the short term, reducing buying momentum, leading to decreased volume and the stock price entering a consolidation phase or experiencing a slight pullback.
Negative News Exhaustion:
When a stock is hit by multiple rounds of negative news (such as profit warnings, poor earnings reports, legal issues), investors typically sell off shares in large volumes, causing the stock price to drop and volume to increase. However, when all the bad news has been digested by the market, and selling pressure peaks, the market may start to rebound.
Impact of Negative News Exhaustion: In this situation, if no new negative news emerges, investors might believe that the stock price has already accounted for all the negative impacts and begin to cover shorts or buy at lower prices. At this point, volume may quickly increase after the stock hits a bottom, as more investors enter to buy at low prices.
Example: A retail company, facing reduced market demand and intense competition, reports several consecutive quarters of poor earnings, leading to a significant drop in stock price and increased volume. However, in the latest quarterly report, the company does not announce any further bad news, and rumors of a potential restructuring begin to circulate in the market. At this point, many investors believe that the worst is over and start buying shares. As a result, volume suddenly increases, and the stock price rebounds.
Investment Strategies Combining News and Volume
Understanding the relationship between news and volume is crucial for accurately judging market trends. Here are some strategies to help you make more informed investment decisions:
Closely Monitor Major Announcements: When you know that a company is about to release earnings or other significant news, pay special attention to changes in volume. High volume accompanied by price swings could indicate a good entry or exit point.
Judge When News Has Been Fully Priced In: Learn to recognize when bullish or bearish news has been fully absorbed by the market. When volume gradually decreases after news is released, this may indicate that the news's impact has ended, and the stock price may enter consolidation or reversal.
Combine with Other Technical Indicators: Do not rely solely on volume and news for investment decisions. You should combine these with other technical indicators (such as RSI, MACD, etc.) for a more comprehensive analysis to increase the accuracy of your judgments.
Conclusion
Volume and news are two critical elements in technical analysis that should not be overlooked. Understanding how they impact the overall market and individual stocks, and how to use this information to make trading decisions, is an essential skill for all investors. For novice investors, learning to observe and analyze the relationship between volume and news can help you better understand the market and develop more comprehensive investment strategies to reduce risks and increase returns.
Remember, successful investing requires multiple considerations and analyses; no single indicator or piece of news can provide a complete market picture.