R-Vol & Why Is It Important?

Everyone wants to buy a multibagger stock. If you read about past winners in detail, you will find one thing in common: they were coming out of a very long consolidation and moved up on very high volume.

The volume in the stock market is the fuel behind every stock’s multibagger journey. No stock I have seen has become four times or five times without an evident spike in the volumes. Volume is the number of shares exchanged between buyers and sellers on any given day. For instance, if the volume of Infosys on any given day is one lakh, that means one lakh shares have exchanged hands between buyers and sellers.

However, often for many days after making a move, a stock will pause, and that is when the volume dries up. Therefore, for any beginner, it is important to take the average volume of the past 20 days to get a true picture of any stock. If the price is rising higher on increased volume, it means that the buying force is higher compared to the selling force.

As we move forward, please keep in mind that the average volume of the past 20 days is a good parameter to begin with. Once an investor has identified a stock that is sitting very close to the resistance zone and is about to break out, there are basically multiple types of entries, depending on the risk appetite of an investor.

Investor A is ultra-aggressive in nature and doesn’t wait for the breakout but buys before it happens. Investor B, on the other hand, is aggressive but not as ultra-aggressive as Investor A and buys once the stock crosses the resistance, whatever time it may be during the day.

Investor C is conservative and has a lesser risk appetite and, therefore, decides that ideally, the stock should break out and sustain above the resistance level for a few hours before making a purchase.

Investor D is ultra-conservative and decides that he will buy the stock near the closing of the day, as that will give him higher volume confirmation.

Folks, in this market, nothing comes for free. If Investor A and Investor B are risking their money without having the confirmation of the price close, they have the advantage of a bigger position size, as their exit point is closer.

On the other hand, Investors C and D have higher confirmation of the breakout, but they are compromising on the position size because their exit point may be farther, and they may miss some initial percentage move.

Suppose the resistance level is 100 for any stock and the current market price is ₹97. You decided to buy the stock when it crosses the level of 100, but you don’t want to be like Investor A, who is very aggressive, nor do you want to be like Investor D, who is always late in buying.

This is where the concept of relative volume comes into play.

Relative volume is today’s volume compared to the average volume of the past 20 days. If the relative volume at 9:40 AM is 30%, it means that the volume has already reached 30% of the previous 20 days' average. If the relative volume is 100% in the first two hours of trading activity, it means that the stock is displaying a higher number of transactions, as the volume has already reached the average volume of the past 20 days.

Now, as the stock crosses the level of 100, you want to see the relative volume on the higher side. So if the average volume of the past 20 days is 2,50,000 shares and the relative volume within the first 15 minutes is 50,000 shares, it means that the R-volume is 20%. Twenty percent is a great number within the first 15 minutes, with still more than five hours left in the trading session.

We try to gauge what can be the probable volume near the closing. What we ideally want to see at the breakout level of 100 is that as the price crosses the level, it should do so on a higher volume.

Folks, everything is a game of probability in the market, but checking relative volume while entering a stock will at least bring some bit of probability in your favour. I always look for a relative volume number of at least 20% when the price is crossing the resistance level, in order to ensure that I am not buying without the presence of smart hands.

You can use any relative volume indicator from the charting platform you use. I use relative volume by Ripster.

I don’t have a clean number of relative volume to show you, because as the price crosses my horizontal line or sloping line, what I tend to see is that the relative volume number should be higher, and most of my buying takes place within the first 45 minutes of market hours.

I hope I have made myself clear with this concept.

I will keep on writing on more such topics.

If you need more detailed letters on stock setups and technical concepts, please check out my website www.chartitude.com, where I host regular live classes twice every weekend and float three newsletters a week.

Thank you.