Focus on the markets: Trading volumes

In the world of share market investing, charts serve as an indispensable tool for decision-making. They provide vital insights into market trends, price movements, and crucial indicators that influence trading strategies.

For serious investors, chart settings can also help you to visualize the human nature aspects of the market and to stay ahead of the herd.

In a recent analysis by Marketech, using a sample of 1000 ‘serious/active’ investors on the Focus platform, some interesting statistics on chart and platform settings came to light.

Here, we delve into the most commonly used indicator – Traded Volume – and explain some of its significance.

Volume – saved by 48% of users in their base chart layout.

Historical Traded Volume is a key fundamental dataset, so it is somewhat surprising that only 48% of users have it set in their primary chart settings.

Elevated or increasing traded volumes can be useful to highlight sustained price movements (as opposed to short term spikes in volatility in thinly traded stocks) and may also help to highlight sustainable changes in direction. Low or falling volumes, on the other hand, may signal indecision or lack of conviction in the market, and can increase the downside risk of a trade. Few stocks will go sideways for very long!

Spikes in buying volume are often linked to wider changes in investor perception or the general outlook for a company, so by combining a news marker on the chart and adding a news alert, it can help you to break through the noise.

An increase in volume is often required to clear out stale investors, or those taking profits at the money. Investors might be sitting in the sell-side to take profits, or get bored with inaction, worry about share price drift, or see greener grass somewhere else. People will often buy for the long term, but consistently worry in the short term. This can create an opportunity.

There are no perfect scenarios, but if you put in the time you will start to see these patterns emerge, and you might be able to use them to your advantage.

Visualizing human behavior

In the example image above, you will note that the periods of lower volume correlate with the periods of share price drift.

Think of it from your own experience. When the buy-side depth thins out, do you worry about the downside? Then, when you see these periods of downward drift, does it cause you to second guess your investment? When you see weaker traded volumes does it make you worry that you might struggle to get out at a good price? Will it just keep falling forever?!

This is the inner voice that challenges every investor, and a chart of any kind is just a visual representation of the daily torment that this group of investors endure – all wanting to maximize their returns, while constantly worrying about loss.

Capitulation and the bounce trade

You will also note a big spike in volume near the end, with the share price diving to the downside after a lower volume sell-off, then a subsequent bounce.

This is usually referred to as capitulation, a very important human behavior to understand.

Again, think of it from your perspective. You put your money into a stock that was going up, and you were very excited about the future. Then the volume dies off, and the stock starts to drift. You hold because nothing has fundamentally changed, and there has been no new information.

For a while you tell yourself not to worry, it’s just a bit of normal profit-taking. But day after day it drifts away, and falls through some fairly important price levels, and seems to be increasing speed to the downside. You hold and you hold and you hold until one day, you’ve had enough! Quick! Get me out before I lose it all!

Then, once the selloff sucks out all of the weak hands, there can be a swift and sharp rebound, as there are now a lot fewer sellers in the queue, and the speculators move in.

The challenge is knowing where and when the sell-off will end…

Always remind yourself that this herd of investors are all battling with their inner voice, fear & greed, and many will succumb to it. These patterns regularly repeat (but not always), as human nature is hard to change. Your ‘job’ in the share market is to learn these behaviors, recognize them, and act accordingly. Then to protect yourself in case you are wrong, because ‘the market’ isn’t always right.

Sometimes this means running against the herd, sometimes it means being the first to run, sometimes it just means you should avoid the stock completely!

How to set up the volume indicators

There are various ways of monitoring volume in the Focus platform. Simply choosing ‘Volume’ from the 39 different chart indicators is the first step; from there, you can choose whether you want to change the colors – to show whether that volume was an ‘Up day’ or a ‘Down day’. You can also use the market scanning tools to look for stocks with higher-than-normal volume.

Then, you might put a moving average (on the volume) to smooth out the day-to-day volatility. You might also want to put a news alert and choose to show a news bubble on the chart. You might want to put on an ‘above a certain volume’ alert to send you a mobile notification if there is a spike in volume, and you might even want to show the depth lines as a histogram on the chart.

Keep in mind again that there is no perfect situation and no perfect indicator. Everyone has their own way of investing or trading, and although this is by no way ‘advice’ on what to do, it is always worth remembering that we are all humans, after all…

How to register for a free trial

All of these tools and much more (including all of the ShareCafe articles and videos linked to mobile alerts) are available on the award-winning Focus platform, for serious or active investors, on PC and mobile app. To trial the Focus platform for free, simply register with an email address by clicking here.

Many of the Focus features listed in this article are available for free. You can then choose a live price-data subscription for $20 a month, or $45 a month for live-streaming, with the added option of Cboe for $20 on either plan. Then, with live data, you can trade for $5 or 0.02% brokerage, on your own HINs, with your money in your own interest-bearing Macquarie CMA.

Marketech Focus is a market-media, data & trading platform supplied in conjunction with optional financial services, licensed to provide General Advice on Securities as Marketech Online Trading Pty Ltd (ACN 654 674 432) an Authorised Representative (1293528) of Sanlam Private Wealth Pty Ltd (AFSL 337927). The above article is general advice only. For more information about the various features, options, and fees, click here for the Terms & Conditions and the Financial Services guide.