Volume Profile Analysis and Importance | Technical Analysis Basics (Part 3)

Summary

In this video, Hitesh from Trademaine discusses the crucial concept of volume profiling in market analysis. He compares volume in stock trading to movie box office success, emphasizing that high trading volume signals stronger price movement and more reliable trends. The video explains how volume correlates with price action and how technical indicators like candlestick patterns, MACD, and RSI are more effective when supported by strong volume. Hitesh also covers the role of retail and institutional investors in volume, concluding that understanding volume is key to mastering market trends and making informed trading decisions.

Takeaways

• 😀 Volume in trading refers to the total number of shares traded in a specific time period, which directly impacts the price movement of stocks.
• 😀 Volume profile is the breakdown of shares traded in specific time frames, helping traders analyze the reliability of price movements.
• 😀 Just like movie success relies on anticipation and quality, stock price movements depend on volume—more volume means more trust in the price action.
• 😀 For a stock's price to move, there needs to be both buyers and sellers, meaning volume is essential for price fluctuations.
• 😀 Even strong technical indicators lose significance if they aren't backed by substantial volume, as low volume can indicate weak or unreliable movements.
• 😀 Volume helps in determining the authenticity of price moves: a move supported by high volume is more reliable than one with low volume.
• 😀 Volume calculation is simple: it's the total number of shares bought and sold within a specific time frame, which can be visualized with charts and tables.
• 😀 Market moves supported by large volumes are more likely to continue, while moves with low volume are often false breakouts or weak signals.
• 😀 High volume during a price increase signals strength and bullishness, while low volume with the same price increase raises caution about its reliability.
• 😀 Institutional investors, such as FIIs and DIIs, contribute significantly more to market volume compared to retail traders, making moves backed by institutional activity more convincing.

Q & A

What is the concept of volume in trading?

Volume in trading refers to the total number of shares or contracts traded for a specific security during a given time period. It indicates the activity level of a stock and can influence its price movement. Higher volume generally signals greater interest and potential price movement.

How does volume relate to the success of a movie?

Hitesh uses the analogy of box office success in movies to explain the concept of volume. Just as the success of a movie depends on factors like viewer anticipation and the quality of the movie, the success of a stock’s price movement depends on the volume of shares traded. More viewers (buyers) mean more success, just like high trading volume supports strong stock price movements.

Why is volume important in technical analysis?

Volume is a key indicator in technical analysis because it validates the authenticity of price movements. Price moves that happen with high volume are generally more reliable and indicative of strong market sentiment, while low-volume moves might signal false breakouts or temporary shifts.

What is volume profiling and how does it work?

Volume profiling refers to the total number of shares traded within a specific time frame for a given asset. It helps traders understand how much activity is occurring at different price levels, which can provide insights into where support and resistance levels may form, or where price moves may be backed by stronger market participation.

How can the direction of price and volume indicate market strength?

If the price of a stock increases with rising volume, it typically signals strength in the market, confirming the bullish trend. On the other hand, if price increases with low volume, the move may lack real support, and traders should be cautious. Similarly, if price falls with high volume, it indicates a bearish market trend.

What happens if a stock price moves with no volume or very low volume?

If the stock price moves with no volume or very low volume, it indicates a lack of market participation, which means the price move could be unreliable or short-lived. Such moves may not hold because they are not backed by significant buying or selling interest.

Why does Hitesh emphasize the importance of volume in trading?

Hitesh emphasizes volume because it is crucial in confirming price movements. A price change supported by high volume is more trustworthy, indicating that the move is supported by a large number of market participants. Without volume, even the most convincing technical patterns may not hold.

How does volume affect technical indicators like RSI or MACD?

Technical indicators like RSI or MACD become more reliable when they are supported by strong volume. If these indicators show a potential signal (e.g., overbought or oversold conditions) and are accompanied by significant volume, the signal has a higher chance of being valid. Without volume, the signal may lack strength and could lead to false predictions.

What role do institutional investors play in volume analysis?

Institutional investors, such as foreign institutional investors (FIIs) and domestic institutional investors (DIIs), contribute large volumes to the market. Their trades have a substantial impact on price movements, and the moves backed by institutional volume are generally more convincing than those driven by retail traders alone.

What does a price movement on high volume indicate compared to a low volume price movement?

A price movement on high volume indicates strong market sentiment and greater participation, suggesting that the move is likely to continue. In contrast, a low volume price movement suggests that the move lacks widespread support, and traders should approach such moves with caution.