Trading volume and liquidity on charts

In simple terms

Beneath most price charts is a row of bars showing volume: how many shares changed hands in each period. Volume tells you how active trading was. It is one of the few pieces of information on a chart besides price itself.

Volume is useful, but it is often misread. The most common mistake is thinking high volume means "more buyers than sellers". It cannot, because every share bought is a share sold.

Volume, value and delivery

• Volume: the number of shares traded.
• Traded value: the rupee value of those trades. It allows comparisons between shares with very different prices.
• Delivery volume: the number of shares bought for delivery into demat accounts, as opposed to bought and sold within the same day. The reading a stock quote lesson introduced it. A high delivery share suggests more of the trading changed long-term ownership; a low one suggests mostly intraday trading.

Every buyer has a seller

When 10 lakh shares trade, 10 lakh were bought and 10 lakh were sold. So volume cannot measure demand outweighing supply. What price movement adds is information about urgency: if prices rose on high volume, buyers were willing to pay up to get shares; if they fell, sellers were willing to accept less to get out.

That is why technical analysts look at volume and price together, never volume alone.

Comparing volume with its average

A volume figure means little on its own. Compare it with the share's own recent average, such as the last 20 or 50 sessions.

Thin volume and unreliable signals

In shares that trade very little, a single order can move the price a lot, and chart patterns can form from a handful of trades. Such patterns are unreliable:

• Breakouts on thin volume can be produced by one buyer.
• Support and resistance levels may reflect a few orders rather than broad interest.
• Indicators built on erratic prices give erratic readings.

Thin volume also means that if you want to sell, there may be few buyers, as the liquidity lesson explains. And manipulators favour thinly traded shares, because little money is needed to create an attractive-looking chart, as the pump-and-dump lesson shows.

Volume distortions

Some volume spikes have mechanical causes:

• Index changes: when a share joins or leaves an index, funds tracking the index trade large amounts on a set day.
• Block deals and bulk deals: large negotiated trades between institutions, reported separately by the exchanges.
• Corporate actions: splits and bonus issues change the number of shares, so raw volume before and after is not comparable, as the adjusted prices lesson explains.
• Derivatives expiry days, when positions are closed or rolled.

Check for these before reading a volume spike as a sign of changed sentiment.

Why it matters

Volume adds a second dimension to price charts. It helps you judge whether a move involved broad participation or a few trades, and it warns you when a share is too thinly traded for chart signals, or for easy selling. Misreading volume, especially as "buying pressure", is one of the most common errors in chart analysis.

Limitations

Volume shows how much traded, not who traded or why. It can be inflated by circular trading and distorted by index changes or block deals. Volume conventions also differ between data providers, for example in how block deals are counted.

Common mistakes

• Reading high volume as "more buying than selling".
• Comparing raw volume across shares with very different prices or share counts.
• Trusting chart patterns in thinly traded shares.
• Ignoring mechanical causes of volume spikes.

Try it yourself

1. Choose a share and note its daily volume and delivery percentage for the last 20 sessions from the exchange website.
2. Calculate the average volume and find the day with the highest ratio to it.
3. Look up the company's announcements and the exchange's block and bulk deal records for that day.
4. Write down whether you found a reason for the spike.