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Volume AnalysisHomeknowledge center Volume Analysis

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Volume Analysis

In the stock market, there are several trade exchanges every day; some buy stocks while others sell them, and a few likes to hold them for a long period. However, these trade exchanges are to be understood in a broader way and which is why we do the volume analysis. Here, the number of shares or contracts that were traded during a specific time period is called volume. In this article, we will discuss the broader point of view about volume analysis and why it is important.

Volume analysis is defined as the number of trade exchanges such as shares and contracts during a specific time period. Technical analysts use volume analysis metrics along with several other metrics to understand more briefly their trading decisions.
But how does volume analysis help in understanding trading decisions? That’s quite thoughtful.
Technical analysts use volume analysis to understand the investing trends along with the fluctuations in price movements. Meaning, the analysts can measure the change in prices of securities with the significance of investments made in them.

Volume analysis is used as one of the important metrics not only by the technical analysts but more in general. If a stock marketer needs to invest in a company’s share, it is important to understand the volume analysis. As per the definition, it is obvious that the volume here refers to the number of shares transacted per day. However, the comparison is too little; in a broader perspective, the volume analysis involves having a knowledge of the trading volume of the entire stock market in comparison to the volume of a single holding.
Volume trends have a lot to speak; for example, continuous increases in prices and trade volumes can impend bullish markets. This is a great signal to invest when the prices are still low before they hit sky-high; this way, the investors can book maximum profit. Similarly, a significant decrease in the price of the shares and the volume alongside is a sign of bearish sentiment and lead to low market; this analysis can be used by investors to sell the positions before they lead to losses.
The analysis also allows the investors to follow a trend even if they are unsure. If there is a trading pattern that the investor is unsure about during the volume analysis, they can orderly use the stop bar strategy to buy more (if downward) or sell more (if upward).

To understand volume analysis, it is important to have indicators that can help the investors to measure the volume. Most of the technical analysts use two of the important volume indicators, the Positive Volume Index (PVI) and the Negative Volume Index (NVI).

What is a Positive Volume Index?

The positive volume index is used to measure the positive impact or increase in the trading volume. Here, the trading volume is compared with the previous day to check if there is any increase. If there is an increase, the PVI (Positive Volume Index) is adjusted.

To calculate PVI,

PVI= PVIprevious + ( (CPtoday −CPyesterday) / CPyesterday )∗PVIprevious
Here,
PVI = Positive Volume Index
PVIprevious = Positive Volume Index of the previous day
CPtoday = Closing Price of today
CPyesterday = Closing Price of yesterday
The change in the positive volume index signifies the prices are being influenced by heavy volumes. This means the increase or decrease in PVI is due to trading in heavy volumes such as buying and selling in huge volumes.

What is a Negative Volume Index?

The negative volume index is used to measure the negative impact or decrease in the trading volume. Here, the trading volume is compared with the previous day to check if there is any decrease. If there is a decrease, the NVI (Negative Volume Index) is adjusted.

To calculate the NVI,

NVI= NVIprevious + ( (CPtoday −CPyesterday) / CPyesterday )∗NVIprevious
Here,
NVI = Negative Volume Index
NVIprevious = Negative Volume Index of the previous day
CPtoday = Closing Price today
CPyesterday = Closing Price yesterday
The change in the negative volume index signifies the prices are being influenced by lesser volumes. This means the increase or decrease in the volume is caused by the trade or buying/selling of lesser volumes.

Summary

Volume analysis is one of the important metrics that help investors understand the market trend from a broader perspective. It is defined as the number of trade exchanges such as shares and contracts during a specific time period. There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume. At the same time, the NVI is used to measure the negative impact or decrease in the trading volume.

  • What is Volume Analysis?

    • The volume analysis is defined as the number of trade exchanges such as shares and contracts during a specific time period. Widely used by technical analysts, this metric is used to understand the market trend and understand more briefly about the trading decisions or investment opportunities.

  • What is a Positive Volume Index?

    • The Positive Volume Index is defined as a measure of the positive impact or increase in the trading volume. Here, the trading volume is compared with the previous day to check if there is any increase. If there is an increase, the PVI (Positive Volume Index) is adjusted.

  • What is a Negative Volume Index?

    • The Negative Volume Index is defined as a measure of the negative impact or decrease in the trading volume. Here, the trading volume is compared with the previous day to check if there is any decrease. If there is a decrease, the NVI (Negative Volume Index) is adjusted.

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RISK DISCLOSURES ON DERIVATIVES

  • 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
  • On an average, loss makers registered net trading loss close to ₹ 50,000.
  • Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
  • Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.

Source:

1. SEBI study dated January 25, 2023 on “Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment”, wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.