Is volume enough as a standalone indicator in deriving price action?

Team Veye | 13-Mar-2022 deriving price

Volume is a very important tool used by most analysts as it shows the participation of traders in a particular stock at a specific time. It is also a very significant tool to know the mood of the traders for identifying the trend it is trying to match with the force.

Investors easily conclude that when a stock is appreciating on high volume, it is more likely to be sustainable. Likewise, a stock that's appreciating on low volume, could be case of a dead cat bounce. Logically, when more money is moving a stock price, it means there is more demand for that stock.

Many experts believe that VWAP can be more useful to spot price action based on volume and thus in identifying potential entry and exit points. It is important because it provides traders with insight into both the trend and value of security.

What is Volume Weighted Average Price (VWAP)?

The Volume Weighted Average Price or VWAP, is similar to a moving average, except volume is included to weight the average price over a one day period. VWAP resets daily and can be calculated based on exchange sessions, primary sessions and custom defined sessions. Traders can also apply standard deviation bands above and below the VWAP.

VWAP identifies the true average price of a stock by factoring in the volume of transactions at a specific price point and not based on the closing price. By monitoring VWAP, one might get an idea of where liquidity is and the price buyers and sellers are agreeing to be fair at a specific time. The VWAP indicator is often used by day traders to figure out intraday price movement. Institutions and algorithms use it to figure out the average price of large orders.

This is a key indicator and guideline for institutions that look to take large positions and need to know whether they are getting in at a good price or not. It also allows them to get into positions without disrupting the market or elevating prices unnaturally with their large orders, resulting in unfavourable entry prices for them.


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