Let's say you visited an auction of cars. It is a cold day of winter and the auction room is small in size and it is almost empty with few buyers in the rooms for auction. It is a vintage car and it is rare in the town. The auctioneer starts the auction with his opening price for the car. After a short pause, the first bid is offered for the car and auctioneer of the car close the auction without any effort to rise the bidding price. The auctioneer sells the vintage car at the opening bid.
Now let's say the same car is available for auction this time the auction is placed in large hall fully decorated and large no of the participant are gathered for auction. It is a sunny dry day people from the different cities are available at the auction. This time the auction room is full of people. The auctioneer starts explaining the vintage car details and starts the bidding process. The price starts rising fast due to the fear of missing out of the vintage car. When auctioneer realizes the rate at which price increased get slow down and only a few people are left for the auction, auctioneer realizes it is the best price for the car and he drops down the hammer and closes the car deal.
- The price change in the first auction is just once due to lack of bidders and the interest of the bidder
- The price change many time in the second example due to large no of bidders available and high interest among bidders
- Both example represents the volume. If you are an auctioneer and participated in many auctions earlier.
- After looking at the total no of people available for bidding you can estimate the price range.
- You can determine whether the people gathering is low - average - high as per your experience and understand the price relationship with people gathering.
- If people gathering is large the auction will run for hours and if people gathering is small the auction will end within a few minutes.
- Therefor price change without volume is meaningless
- Price change with large volume least longer whether in uptrend or downtrend
- Let say you have a water pipe with a water sprinkler attached to it.
- In this case, water is our price and the sprinkles are the volume
- If we open the tap water will leave the sprinkle with no great force
- But if we open the tap and hold the one end of the pipe and store the water in pipe and then release the water the water sprinkles will leave the pipe with high pressure
- In both cases, water is same but the time is a factor which cause the high pressure
- So if the stock price is holding a certain level for a few days and when it breaks the level if will move fast this is called the breakout or breakdown in stock prices