Importance of volume in stock trading

Importance of volume in stock trading

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Volume is like a fuel to the market. Volume tells whether the buying interest or selling interest is increasing or decreasing. Volume is an important parameter to identify the position of smart money we want to follow them and do whatever they are doing now if we are trading against the smart money we will lose money in the stock market and if we trade with then we will earn money in the stock market. You have heard the words like buying climax and selling climax. when the market is in bearish phase and strong volume appears on chart this is the buying climax when smart money is buying and retail traders are selling the stocks and when the market is trading in bullish phase and high volume appears on the then this is a selling climax when retail traders are buying the stocks and smart money is selling the stocks. So when high volume appears on the chart think like a wholesaler if he finds something cheap he will buy in large quantities and if he thinks this is the highest value of his product he starts selling the product by giving advertisement and commission. Before moving forwards read this story.

Story to understand the importance of volume in the stock market

1. Ram has a unique business in the city licensed by the government and he buys and sells his products from people and to the people of the city. This product has an intrinsic value that never erodes and it remains the same and increases overtimes.
2. But ram figures out a problem, he thinks if he always buys and sells the product at low margin how will he manage the other expense of his office.Ram says he need to act quickly and increase his profit margin.
3. Ram figure out a solution to this problem and think what would happen when he shares his product shortage problem to his friend. He knows his friend will tell everyone, it is equal to giving an advertisement on a news channel. He checks his warehouse assures himself he will fill all the demand.
4. On another day he meets his friend and shares his product shortage problem. After some days the sales of the product start increasing, people are buying in large quantities. He thinks his plan is working. He is very happy and his customer is also happy because the customer think the product will soon out of supply and price increase.Ram is happy because he is selling more and earning more money day by day.
5. After looking at the people demand for product ram decide to increase the price of the product. After increasing the price the demand for the product is not decreased because of missing out fear. People start buying even more quantities than earlier
6. This process continues for some time and after some time some of his customers start selling the product to ram at a higher price but ram doesn't care about it because he has large customers still buying the product at higher rates.
7. After selling all the products at higher rates ram looks back at his warehouse and finds he has very few products left in the warehouse.Ram is facing a problem if he sells all the product he will be out of the business soon.
8. He needs to get back his product from the people to run the business. Again he applied the same formula he tells his friend that the value of his product will decrease by 80% in the upcoming month because another company has the same product at cheaper rates.
9. People don't check the fact of another product news and after some days a large no of people arrives at ram Wearhouse to sell the product at 30% loss. Because the supply is greater ram decide to buy the product at 50% discount from the purchase.
10. People are ready to sell the product at 50% loss because of the fear of getting nothing after a few months.
11. As the price of the product falls furthermore people start coming in the warehouse to sell their product even at large loss.
12. Ram buys all the products from the peoples after the panic selling is over he starts to sell the product at the intrinsic value of the product and people again start buying the product because the product value is justified.

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