Net volume indicator – what is it, and how does it work?

Have you ever considered the net volume indicator and how it works? What is the “net volume” as a term exactly, and why should motivated and ambitious traders and investors in the market know all there is about it?

Regardless of your boring trading career, expertise, and goals in the volatile market, to achieve success, you must understand the indicators that can increase your awareness in the volume analysis, market activity generally, and, therefore, your profits.

All those technical analysts and buyers and sellers who are interested in trading indicators in the stock market, or generally in the financial market, should learn all about the trading volume. They especially need to pay attention to the net volume indicator, that’s extremely important and useful nowadays. 

To successfully understand the net volume indicator, let’s get to know the basics of the volume itself first, shall we?

What is the definition of net volume? 

The experts define net volume as a technical indicator that is measured by the subtraction of the uptick volume of a certain security by the downtick volume in a certain time span. It is considered a simple technical analysis tool that functions on an effortless calculation.

Normally, net volume is arranged beneath the price charts. It has bars for every period that specify the following volume reading. Even though it may resemble the usual volume, it’s diverse in means if the market sentiment is bearish or bullish.

In simple words, this type of indicator was invented to spot differences between uptick and downtick volume easily. The uptick volume refers to the volume of particular company shares that traders trade once the stock price grows. 

On the other hand, the downtick volume refers to the volume of shares that traders trade once the stock price moves downwards. 

Understanding the net volume indicator

The main principle of the net volume indicator is the following:

•  “Net volume = Security’s uptick volume – Security’s downtick volume.”

As seen from the principle above, the net volume functioning is pretty simple, aggregating the entire positive and negative moments of the total sum due to a particular span of time. 

The complete movement’s rise is bigger than the entire movement’s fall. Thus, this indicator shows either positive or negative net volume. Positive volume tells us that certain security is going through a bullish upswing. On the other hand, the negative one tells us that it’s been through a bearish downswing. 

How do traders use this indicator? 

While searching for additional opportunities in the market, numerous traders and investors use the indicator together with other principles of technical analysis. Those principles encompass the following:

• Diverse chart patterns
• Other technical indicators.

Traders may analyze a stock’s breakout from a crucial resistance level and assess the net volume to determine the strength of buying pressure and the potential momentum from now on.

Technical analysis and the indicator – what you need to note 

Volume is the traded amount of security. It’s a commonly used indicator tracked by exchanges and data providers. Charts show volume as red/green bars with a moving average or price trend line.

Volume reflects stock price momentum. Events can raise/fall trading volume. Positive news indicates the strength, leading to high buying volume at support levels and selling volume at resistance levels.

Resistance level

Investors sell stocks above this level. They prefer closing positions for profits instead of waiting for higher prices, risking losses.

Support level

Investors buy stocks at this level, considering it a price floor. Support and resistance levels gauge market sentiment and guide trading decisions.

Volume Weighted Average Price (VWAP)

VWAP determines the average security price based on trading volume. If the stock price exceeds VWAP, investors favor long positions. If the price falls below VWAP, short positions may be preferred. 

However, VWAP should not be solely relied upon as a predictive indicator due to its historical nature and potentially misleading effects caused by rapid price fluctuations.

How can you compare the net volume indicator? 

The net volume focuses exclusively on volume within a specific timeframe, distinguishing it from other momentum indicators considering additional factors. While indicators like the money flow index and on-balance volume incorporate price and volume, net volume solely examines volume.

Traders often employ more intricate momentum indicators for analysis, but net volume can still be relevant when examining a single period. It provides insights into market interest, buying and selling pressure, and volume changes. Complex indicators such as the relative strength index assess the magnitude of gains or losses.

Understanding price movements, volume trends, and price action are crucial for traders, and net volume serves as a valuable tool when examining specific periods. It complements other indicators and aids in identifying potential opportunities.

Bottom Line

Net volume is a simple technical indicator that measures the difference between uptick and downtick volume in a specific time frame. It helps identify bullish or bearish market sentiment. Displayed as bars below price charts, net volume indicates volume readings for each period. 

Uptick volume represents shares traded during price increases, while downtick volume reflects trading during price declines. By analyzing net volume, traders can identify high-volume periods and potential overbought or oversold conditions. It complements other indicators and aids in spotting buy or sell signals based on closing price trends.