There is no simple way to earn profits through stock trading. Many of us, especially the new entrants, believe that it is just a question of buying and selling. This is not true. The prices of stock do not rise or fall just like that without any rhyme or reason. There is always a cause behind any change in the prices of the stocks. You see the price of a stock rising or falling. Since you don’t have any information you find that you are unable to take a decision on whether to buy or sell short that particular stock.

There are ways in which you can find out whether there is really some information/reason behind the changes in the price of a stock. For this you need to follow the movements in the price along with the volumes. Today when we read the business section of the paper, or obtain online quotations of our favorite stocks, one of the statistics which usually goes unnoticed is volume data. After seeing the price of a security, which is usually of primary interest, we may look next at data such as yield, price-to-earnings ratio, market capitalization, or ex-dividend date, before even considering the volume statistic. Trading volume does have a relationship to price data, returns, and other aspects of portfolio theory.

For example, McDonald’s Corporation (NYSE:MCD) had an average trading volume of 7.58 million shares per day. On December 17, 2002, they announced a warning and reduction of expected earnings. The news led to trading of 35.17 million shares that day, about five times the average, and a drop in price of 8%. The abnormally large volume was due to differences in the investor’s view of the valuation after incorporating the new information. As a trader you can infer from abnormal trading volume to arrive at a logical decision. An increase in the volumes is a clear indication that investor interest has increased in that particular stock. Now, investor interest could have increased because there are many interested in buying or there are many who are interested in selling. This is the first indicator that can help you to take a decision on investing in the stock, for buying it or selling it short. Even in cases where you don’t have any information, the changes in the volumes that are traded can act as a tool for you to decide.

Trading volume has been shown to have a relationship to securities prices in a few different ways. Researchers have modeled and determined empirically that large turnover occurred during times of large absolute price change, although significance could not be found for the direction of this price change. By following the volumes traded we can use it as a tool for decision making to invest in shares. Along with the volumes the direction of the price change will help in deciding whether to go long (buy) or go short(sell) a stock.