Volume and Price Movement

Having talked about Open Interest (OI) and Volumes, it makes sense to gain a better understanding of these two. These two reveal certain points about the price movement, and there is a general consensus among traders what these signs indicate.
First let’s talk about the association of volume and price movement. An increase in volume is generally a positive sign about the price movement of a security, i.e. when the price of a security is increasing/decreasing, and the volume is also increasing, it signals that the price movement will trend, though the time period may vary from a few days to few months. On the other hand, if the volume is decreasing, it signifies that the movement is weak, i.e. a reversal in the movement is expected. If the price increasing/decreasing, and the volume is decreasing, it signals that the price is expected to decrease/increase in the near future, and that the established trend is about to end.
Now think about it. The reason that volume is usually a strong signal is that markets work on the mentality of the market participants. When the volume is high, it is an indication of the fact that a large number of market participants are ready to trade at the market level. Since, the people are trading in large numbers at the market level, the trend that has been set in motion is expected to continue as the market has expected this movement.
But do not take this to be an absolutely correct indicator, as this does not always work, and is susceptible to manipulation. But the signal is considered quite reliable if other factors are also considered. We’ll talk about other factor that allows scope for manipulation in the next article.

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