Net Volume
| Net Volume |
|---|
| See also |
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).
Examples of Net Volume
- Net volume can be used to measure the strength of a particular stock. For example, when a stock is showing an uptick volume that is higher than the downtick volume, it can be seen as a sign of bullishness. This could indicate that the stock is experiencing higher demand than supply, which could be due to positive news or investor sentiment.
- Net volume can also be used to assess the strength of a particular sector or industry. For instance, if most stocks in a sector are showing upticks that are higher than their downticks, it could be an indication that the sector is in a strong bullish trend.
- Net volume can also be used to detect possible trading opportunities. For example, if a stock is showing a higher uptick volume compared to a downtick volume, it could be an indication that the stock is undervalued and could be a good candidate for a buy. On the other hand, if a stock is showing a higher downtick volume than an uptick volume, it could be an indication that the stock is overvalued and could be a good candidate for a sell.
Advantages of Net Volume
Net volume is an important economic indicator for stock traders as it provides a quick way to identify market trends. Net volume can be used to help investors make decisions and assess the current market conditions. Below are the advantages of using net volume:
- Net volume provides traders with a clear understanding of the market sentiment by measuring the overall demand and supply of a stock. It provides traders with an indication of whether the market is bullish or bearish.
- Net volume helps traders to identify potential support and resistance levels. By analyzing the net volume, traders can determine the areas where the price may reverse.
- Net volume can be used to identify potential trading opportunities. By studying the net volume, traders can detect possible breakouts and reversals.
- Net volume also helps traders to determine the strength of a stock’s trend. By analyzing the net volume, traders can determine whether a stock’s trend is strong or weak.
- Finally, net volume can also be used to identify potential price targets. By analyzing the net volume, traders can identify the areas where the price is likely to move.
Limitations of Net Volume
Net volume is an important tool for stock traders to assess the overall market sentiment. However, there are several limitations to this indicator that should be taken into account before making trading decisions. These limitations include:
- Net volume does not take into account the overall trading volume. It only takes into account the difference between the volume of shares that were traded when the stock price was rising (uptick volume) and the volume of shares that were traded when the stock price was falling. Thus, it does not provide an accurate picture of the overall market sentiment.
- Net volume does not take into account any fundamental or technical factors that might be affecting the stock price. It only looks at the volume of trades and does not take into account any other factors that might be influencing the stock price.
- Net volume does not take into account the size of individual trades. Thus, it is possible for a large trade to affect the net volume significantly, even if the overall market sentiment is not actually changing.
- Net volume does not take into account the time frame that the trades are taking place in. Thus, it is possible for short-term spikes in the net volume to be misinterpreted as significant market trends.
Overall, net volume is an important indicator for stock traders to consider, but it should not be the only factor taken into account when making trading decisions.
- On-balance volume (OBV): This is an indicator used to measure buying and selling pressure in a stock. It is calculated by adding the volume of a stock when its price increases and subtracting the volume of a stock when its price decreases (Emini-watch, 2020).
- Volume-weighted average price (VWAP): This is an indicator used to measure the average price of a security over a certain period of time. It takes into account the volume of shares traded and assigns respective weights to each trade (Emini-watch, 2020).
- Accumulation/distribution line (ADL): This indicator is used to measure the intensity of buying and selling pressure on a security. It is calculated by adding the volume of a stock when its price increases and subtracting the volume of a stock when its price decreases (Emini-watch, 2020).
In conclusion, Net Volume is an important economic indicator used by stock traders to assess the trends on the market. Other approaches related to measuring buying and selling pressure include On-balance Volume, Volume-weighted Average Price and Accumulation/Distribution Line. All of these indicators can be used to gain insight into the market sentiment and make informed trading decisions.
References
- 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
