Psychology behind the volume in share market

Before we move to the article – psychology of volume in stock trading. I have presumed that readers have a basic understanding of various concepts of stock trading. If not, then i will suggest you to firstly get the basic insight into stock trading, otherwise, you will gain nothing from this article. Those who are curious to know the psychology of volume in stock trading, then this article is for you, but you might need to read it more than once as the concept of the article is deep and might take 2nd reading to get completely grasp in your mind.

1) What is the volume in stock trading?Volume in stock trading

Volume in day trading represents the activity of traders and investors. Volume in stock trading is referred to as the number of shares/stocks that are traded (changed hands) during a given time frame i.e measure of  the total number of shares that are bought and sold in a given time frame.  If a stock has a volume of 500 it means total five hundred shares of the company were traded (bought and sold) during that time frame. For every buyer in the market, there is a seller, and each transaction between buyer and seller contributes to the count of total volume. That is, when both buyers and sellers agree to make a transaction at a certain price, it is considered  as one transaction. If only ten transactions occur in a day, the volume for the day is ten.

  • Candle/Bars in volume chart are usually colored green or red. Green represents net buying volume while a red represents net selling volume
  • Volume is the backbone of any stock. It represents the interest of people in the trading activity of a particular share.
  • Heavier volume indicates heavier interest and vice versa
  • Volume can provide clues as to what is going on in the market and the interaction between demand and supply.

2) Volume psychology- how the market crowd react to losses

Volume in stock trading reflects the degree of financial and emotional involvement.

Traders react to losses like a frog react to hot water. If you put a frog in boiling cattle, it will jump in response to sudden pain but if you put a frog into cool water and heat it slowly, you can boil it alive.

Similarly, if a sudden change hit traders, they jump from pain and exit their losing position, but the same trader remains patient if losses increase slowly and gradually.

3)  The psychology behind extremely high green volume candle:-

  • Once the demand for share starts increasing, some traders and investors feel optimistic that the price of  the share will move up and they execute a long position by buying the shares but the question is that who is selling to them at this high demanding situation? Short Sellers are selling to them because they hope that price will fall and they will earn the profit.
  • Once the price starts rising, stop loss of short-sellers starts triggering, and to minimize losses they buy the shares and exit the position. i.e demand of share has increased drastically because at this stage long position traders are buying to earn profit and short-sellers are buying to exit the position – to minimize their losses
  • Now again question is that, in this extremely high demanding situation, from where they (long position buyers and short sellers) are buying  (i.e who is selling to them).  Again at this stage new set of short-sellers enter the market and short sell the stock hoping that price will fall.
  • Again the above cycle repeats itself and results in a high length of green volume candle due to heavy demand.

In this case, traders who took long position earn profit, and traders who short sell suffer losses.

When shorts give up during a rally, they buy to minimize their losses and push the market higher. Price rise, swipe out even more short-sellers and rally feed on itself

4) The psychology behind extremely high red volume candle:-sell volume trading

  • Once demand starts decreasing or supply of share start rising, short-sellers feel optimistic that price will fall and they start executing short selling the share but the question is that who is buying from them at this situation when the supply of stock is high. Long position buyers are buying from them because they hope that the price will rise and they will earn a profit.
  • Once the price starts falling, stop loss of long position buyers starts triggering and to minimize losses they sell the shares and exit the position. i.e supply of share has increased drastically because at this stage short sellers are selling to earn profit and long position buyers are selling to exit the position – to minimize their losses
  • Now again question is that to whom they both (short-sellers and long position buyers ) are selling. Again at this stage new set of long position buyers enter in the market and buy the stock hoping that the price will rise and again the above cycle repeats itself and result in a high length of  red volume candle due to more supply.

In this case, traders who did short-selling earn profit, and traders who took long position suffer losses.

When long give up during a decline, they sell and push the market lower.  The falling price of share swipe out even more long position traders and decline feed on itself

5) Who buys from a trader?

  • it may be short seller covering shorts (i.e he had already short sell the share and now want to buy shares to exit his position)
  • Investors step in because price are too low. They buy the share and keep it in their account till it reach their target price.

6) Who sell to a trader?

  • it may be an investor who take profit on his long position and wants to sell.
  • It also may be a short seller who think that price are too high and he short-sell the shares. (short seller hope that the price will fall and he short sell the shares and wishes to buy later when the price will fall)

So this article was all about volume psychology how extremely high and low volume candles impact market psychology. If you still have any doubt or question, please comment us below and give your valuable feedback.

Happy investing!

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