Net volume is an economic indicator used by stock traders. It is calculated by subtracting the volume of shares that were traded in the period of time when a stock price was rising (uptick volume), by the volume of shares that were traded in the period of time when a stock price was falling. It is used to assess whether the trends on the market can be described as bullish or bearish (Yamarone, 2012).
Bullish and Bearish market
The difference between Bullish and Bearish market:
- Bullish (or bull) market occurs when stock traders are suspecting that assets that are of interest will rise in price and the prices on the market are rising.
- Bearish (or bear) market occurs when stock traders are suspecting that assets that are of interest will fall in price and the prices on the market are falling (Chan et al., 2002).
When the net volume indicator of a certain security is positive, it suggests an upswing in the value (increase of the price) of said security. When the net volume indicator of a certain security is negative, it suggests a downswing in the value (decrease if the price) of said security. Net volume is one of the key indicators used by traders when looking for opportunities in the changing market (Ben-David, Franzoni & Moussawi, 2012).
Net volume versus other indicators
How do net volume presents versus other indicators:
- Money flow index - it uses both price and volume of a given security to assess its situation on the market, whereas net volume looks just at the volume.
- On balance volume - it measures volume flow of a given security over time, rather than analysing a single definitive period as the net volume does.
- Relative strength index - it is a momentum indicator that analyses the magnitude of price changes (gains and losses) to assess whether the conditions in the value of an asset can be described as overbought or oversold (Baumohl, 2012).
It is recommended to use several different economic indicators when making a stock trading decision.
Fiscal policy and net volume:
- Dovish government's fiscal policy - in other words, expansive policy. Credits have low interest rates and saving money doesn't bring enough profit. Market becomes flooded with money. It stimulates economic growth, but at the same time increases inflation.
- Hawkish government's fiscal policy - in other words, restrictive policy. Credits have high interest rates and saving money makes sense. Money is leaving the market. It is used to fight inflation, but at the same time it slows down the economy. Stock traders prefer hawkish fiscal policy, because it causes the increase in stock prices and is more of interest for them (Hurd & Rohwedder, 2012).
- Baumohl, B. (2012). The secrets of economic indicators: hidden clues to future economic trends and investment opportunities, FT Press.
- Ben-David, I., Franzoni, F., & Moussawi, R. (2012). Hedge fund stock trading in the financial crisis of 2007–2009, The Review of Financial Studies, 25(1), 1-54.
- Chan, K., Chung, Y. P., & Fong, W. M. (2002). The informational role of stock and option volume, The Review of Financial Studies, 15(4), 1049-1075.
- Hurd, M. D., & Rohwedder, S. (2012). Stock price expectations and stock trading, National Bureau of Economic Research, (No. w17973).
- The Economist (2011). Guide to Economic Indicators: Making Sense of Economics, John Wiley & Sons.
- Wang, J. (1994). A model of competitive stock trading volume, Journal of political Economy, 102(1), 127-168.
- Yamarone, R. (2012). The trader's guide to key economic indicators, John Wiley & Sons, (Vol. 151).
Author: Mateusz Wójcik