What is the importance of Trading Volume?

We tested trading activity before 1070 announcements and found that for 68 announcements, we can reject the ‘null hypothesis’ at our significance level. It should be noted that this trading activity represents a small proportion of the total UK equity market activity during 2018. We have previously measured market cleanliness using a calculation of the percentage of UK takeover announcements that show abnormal price movements in the 2-day period ahead of those announcements.

It is relatively stable throughout the year, with the lowest period being the 4th quarter, at 5.5%. Statistically significant increases in trading volumes ahead of certain announcements, do not mean that market abuse occurred. However, it is an indicator that market abuse may have occurred. We do not yet have a historical comparison of the new statistic as the calculation uses MiFID II transaction reporting data .

DAX chart

We also include key derivative contracts for those instruments, namely CFDs and spread bets, to capture the broader trading activity in those instruments. The shorter the period, the more announcements we can include in the model (as there are fewer overlapping potentially price-sensitive announcements). However, a shorter period reduces the number of Observations used in the statistical test. An event is defined as an unexpected, potentially price-sensitive announcement.

Many of the brokers who provide volume data will be supplying the volume of trades placed by their clients. This is in stark contrast to the total market volume, which would play a much more significant role in understanding where the market will go next. The problem often lies in the fact that such data costs money, and certain markets are easier to obtain data for than others.

Stock Trading Analysis with Volume Trading

It is important to note that between 74-89% of retail investors lose money when trading CFDs. These products may not be suitable for everyone, and it is crucial that you fully comprehend the risks involved. Prior to making any decisions, carefully assess your financial situation and determine whether you can afford the potential risk of losing your money. Moments of extreme volume, which are accompanied by dramatic price moves, can result in the markets moving out of the financial press and into the mainstream news flow. If passive investors are triggered to buy or sell as a result, then this brings greater momentum to the trend that is forming.

The additional metric is based on the premise that inside information should be properly controlled. It should only be disclosed to those who need to know it and should not be used to trade ahead of its disclosure to the wider market. This course has been endorsed by the Quality Licence Scheme for its high-quality, non-regulated provision and training programmes. This course is not regulated by Ofqual and is not an endorsed lesson. One Education will be able to advise you on any further recognition, for example, progression routes into further and/or higher education. For further information, please visit the Learner FAQs on the Quality Licence Scheme website.

TRENDING

While technical analysis is at the heart of the strategy, fundamental factors also need to be considered. If the spike in volume is due to a sudden geopolitical event or an earnings announcement, then it’s less likely to be an OBV-style signal that real money is building a position over a period of time. Low volume indicates that there are fewer buyers and sellers on the market, which will translate to less liquidity.

Slippage in liquid markets is usually considerably less compared to that in low-volume markets. In the Indonesian capital market, corporate stock trading volume action is commonly used. Public companies adopt corporate activities to improve their performance and benefit their shareholders.

Fast Moving Average Crossovers

You’ll usually see volume depicted as vertical bars underneath a price chart. Systematic trend-following strategies account for an increasing amount of trading activity. Algo-based hedge funds that follow trend strategies incorporate a whole range of data points when determining whether to trade or not. One of these metrics https://xcritical.com/ is volume, so if some of the biggest players in the market are using volume as a guide, it makes sense for smaller traders to do the same. The Trade by Volume metric does offer a better steer on what price levels are important. It comes down to the data being handily presented on the vertical axis of the chart.

This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. For further details see our full non-independent research disclaimerand quarterly summary. Volume plays an important role in trading for many, but is an element that is typically overlooked by retail traders for a number of reasons. It’s important to remember that Volume Profile updates each time a new order is executed.