Separate wheat from chaff – Using Volume Data to pick stocks!

Sharply oscillating stock prices often  push traders into taking action like total commitment or a total divorce from the counter – and unless the decision is driven by fundamentals, looking only at price is the wrong way to go about taking decisions.

Wiser traders often use Price in conjunction with Volumes to take decisions while seasoned investors look at “deliverable volumes %” behavior over recent times before taking a plunge. Lets learn why.

Basics: Defining Volumes

Volume is the number of contracts (or shares, or forex lots) that are traded during a particular time frame. Volume is often shown along the bottom of an asset’s price chart. It usually shown as a vertical bar, representing the number of shares (or contracts or lots) traded during the time frame shown on the chart. For example, if viewing a one-minute price chart, there would be a vertical volume bar below each price bar, showing how many shares changed hands in that one-minute (The PL Mobile App (Download at www.plindia.com/plmobileapp) shows real time charts with volumes).

On the other hand, deliverable quantity or Deliverable Volume is the quantity of shares which actually move from one set of people (who had those shares in their demat account and sold today)  to another set of people (who have purchased those shares for their demat account).

Why volume matters

Security wise position is the data related to price, total traded volume and delivered volume provided by NSE (https://www.nseindia.com/products/content/all_daily_reports.htm) and BSE (https://www.bseindia.com/markets/equity/EQReports/GrossShortPos.aspx?expandable=3&flag=0) on daily basis for particular stocks that trade on these exchanges. NSE and BSE, also gives the figure of deliverable positions as a percentage of total traded volume (the last column in figure below) and from stock market investment perspective it’s quite interesting to interpret the relationship between price movement and delivery percentage.

Looking at stock volume is important because it shows whether there is interest in trading the stock – period! After all , no one wants to get into a counter where volumes are thinning down. A stock that trades on low volume is more exposed to sharp price movements plus there could be unknowns in  the mix which are best avoided.

Sharp jumps in total volumes combined with prices often allow traders to form a strategy around such counters and the ensuring volatility

On the other hand, looking at not the total volumes but also the delivery volume does indicate the level of Investor interest in a stock albeit in a short-term timeframe. If more people are taking delivery and prices have been rising, it means there is a high level of confidence in future upmoves of the stock and  people are preferring to take the stock home instead of exiting intraday.

As a corollary, it follows that :

  • A low deliverable quantity or delivery percentage is indicative of a high intraday activity (Buying in the morning and selling in the evening or vice versa). This means that the current price trend (either up or down) is dubious and will be short lived
  • A high deliverable quantity or delivery percentage is indicative of positional or long term activity i.e. buying and holding for long term (bullish) or selling and getting out of the stock completely (bearish). This means that the current price trend (either up or down) is going to sustain for relatively longer period

If both volume and delivery percentage are showing a rising trend then it means the existing price trend will continue.

Using this information

Remember that volume alone cannot be relied upon – you should take into account fundamentals and the actual price movement of the stock. Then of course, look out for sudden changes in volume and see if it is because of some event or change in fundamentals for the company .

The  ideal way to do things would be :

  • Check the average delivery volume two-three months prior and compare to recent volumes
  • Remember – any sharp price movements accompanied by very small volume may not be sustainable for long.
  • Keep in mind, if stock prices have rallied substantially and volumes are also at the highest it could be close to a market peak.
  • Compare the overall market delivery volume with the stock volume to see if there is any extraordinary interest or lack of it in the stock. Also verify this against recent news and stock fundamentals to see if a volume pick up or fall is in line with what’s happening in the company.

Of course  volumes data could be biased by things like lots of investors taking up BTST trades or the company jiggling its share capital etc but then al off this gets smoothened out with longer timeframes.

If recent volume activity has been  higher than  average as well as prices have improved but away from peaks, the stock may be well on its way to glory! (And vice versa!).

 

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