Volume analysis of a stock is the count for the number of times a particular financial asset such as a stock, a futures contract, or an options contract and many more, is traded in a given period of time. Volume analysis lets one understand if the stock has force behind a stock rise or a decline.
In the graph above, the y-axis measures the stock price in the USD and the volume of the stock. As seen in the above, each point of the dataset represented on the x-y plane above represents two aspects of the stock: the stock price along the y-axis and the time, denoted on the x-axis. The vertical length of the cylindrical boxes directly corresponds to the volume of the stock. It serves to measure how many trades on the stock are taking place at / in a given moment in / duration of time.
Volume analysis also signifies the level of optimism in the market; for instance, in portions of the graph where the data points are green are points during which the market was rising. In such a scenario, a high volume tells us that the market is actively buying more of the stocks thereby signifying higher levels of investment and therefore capital for businesses. This would be characterized as a bull economy and prices would increase contributing to economic growth in the financial markets. Contrarily, portions of the graph where the data points are red represents those durations of times when a particular stock asset is declining in value, a high volume would indicate an active act of selling by the investors thereby signaling the lack of confidence in the firm.
Volume analysis might also hint us directly about the movement of the stock; for instance, if you see that the volume of the stock is on a downward trend, but the stock price is continuously rising, you could expect the stock to decline soon as the push behind the stock is fading away.
In order to cement the confirmation of volume analysis the first check must be to see if prices are moving and their corresponding volumes. A growth or decline with high volume levels signal more active interest in the stock or the company wherein major fundamental changes are causing the change in the market’s opinion on the company. Contrarily, a price movement in the corresponding times of low volumes might could strongly signal a market reversal as there is declining interest in the direction of the stock, wherever it might be heading at that point in time.
Volume analysis can be tricky sometimes in the case of very volatile stocks. Stocks can be considered volatile if both the stock price and the volatility of the interest in the stock or volume fluctuates by significant amounts within short periods of times, many times intraday. For instance, if a stock price declines and then rises only to decline again during a time of increasing volume, one should expect to rise in case the second drop stopped before the lowest point of the first drop. This technique could be very useful to understand very volatile stocks such as Tesla during the earnings week.
Volume Analysis is a part of Technical Analysis of a stock and an alternative approach to stock analysis is fundamental analysis. According to many analysts, there is no scientific or technical way to predict the stock price completely; this is because in many cases the stock price might fluctuate due to the irrational actions of buying and selling by many individuals. In these cases, the simple technical analysis would fail as the stock market would move erratically without a pattern. Therefore, the non-believers of technical analysis bank on this opinion that it is not possible to use numbers to predict stock prices. However, I believe that by looking at metrics such as volume pressures can give us a clear understanding on the pattern of stock analysis in most times but not all.