In our previous article, we covered the nuances of having a trading plan. Now that we have gotten into the stronger details of intraday trading, the first thing you need to understand is the relation between price and volume. A trader might have several indicators and screeners to work on his trading plan but the only driving force of a price is volume. If you understand how volume affects the price movement, you can consider yourself a professional trader who knows how to navigate between the ups and downs of the market.

The most opportune chances a trader gets to make money is to capture an up or down trend from the get go. So, how can you capture such trends? If you take a look at the type of traders in the Indian market, you’ll find that there are two classifications – institutional traders and retail traders. Institutional traders are fund managers and large quantity buyers like FIIs (Foreign Institutional Investors) and DIIs (Domestic Institutional Investors) and sellers who have a lot of money power to create a significant movement in the price of a security. Retail traders are traders the other traders who put in a small capital and trade off that. Their buying and selling does not create a ripple in the movement of a stock’s price.

From this, we can understand that institutional buyers and sellers have to trade in extremely large volumes to create that kind of an impact. The underlying concept is that their trading decisions are backed by high level fundamental and technical analysis to hold their positions for a long term. Their portfolio can take short term hits and dips whereas a retail trader’s portfolio will be diminished by a greater margin for the same event.

The bottomline is, when institutional traders make a move, it is hard for retail investors to resist the move or turn the direction of a trend. It simply plays with the psyche of retail traders. More than 95% of the retail investors fail because they do not observe the moves made by institutional traders and capitalise on the trend. This also goes out to show how effortlessly a trader can make money by simply following the moves of institutional traders and replicating it.

This is how volume and price decide the trend of a security:

 

Strongly Bullish

Volume Price Effect
Increasing Increasing Strongly Bullish
Increasing Decreasing Strongly Bearish
Decreasing Increasing Bullish
Decreasing Decreasing Bearish

 

Both Price and Volume Increases

If you observe that the price of a stock has breached a trend line or previous high/low, most traders assume that it indicates the start of an up trend. But with that, comes the problem of false breakouts which could result in your position hitting the stoploss. So when can we confirm that a breakout is true? When the breach is accompanied by a large volume. Like we mentioned earlier, buying or selling in large volumes indicate institutional buying so you can safely assume that a new trend has begun.

Price Increases but Volume Decreases

Most novice traders fall prey to this situation where the price increases but the volume decreases. For an active stock which involves large institutional buying and selling, the bid/ask gap is extremely narrow. If the gap increases, make sure that you do not participate in the stock. While it might seem like the trend line is breached and the price of the stock still increases, even a large buying or selling from heavy weight retail buyers could reverse the direction of its movement.

Price Decreases but Volume Increases

This scenario would indicate that a strong downtrend is about to start. From this, you can also understand that volume is the dictator of the strength of a trend while the price denotes the direction of the trend. If the volume with which traders are exiting a stock is increasing, it implies that the large institutions are reducing their involvement with the company. It should immediately warn you about the direction the stock is going to take. Depending on this, you might be able to assess the short term movement and either exit your long positions or take fresh short positions.

Both Price and Volume Decreases

When this happens, it might seem like a downtrend is about to start but a decrease in volume indicates instability. It could also mean that you need to brace yourself for a strong pullback in the upward direction. So, do not jump on the price movement immediately but wait for a movement supported by strong volume.

In the course of your trading career, you will come across several other combinations of market events which could affect the movement of the stock. But it all comes down to movements supported by good volumes. While it might be simple enough to keep your eyes peeled for institutional buying, it always helps to confirm a signal with your own trading plan. Happy trading!

  • Stephen Irudhayaraj

    how to get information about FII”s buying or selling

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