In fact, volume plays an important role in technical analysis and features prominently among some key technical indicators. When analyzing volume, there are usually guidelines used to determine the strength or weakness of a move.
As traders, we are more inclined to join strong moves and take no part in moves that show weakness—or we may even watch for an entry in the opposite direction of a weak move.
These guidelines do not hold true in all situations, but they offer general guidance for trading decisions. A rising market should see rising volume.
Buyers require increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, and this is a warning of a potential reversal. This can be hard to wrap your mind around, but the simple fact is that a price drop or rise on little volume is not a strong signal.
A price drop or rise on large volume is a stronger signal that something in the stock has fundamentally changed. In a rising or falling market, we can see exhaustion moves. These are generally sharp moves in price combined with a sharp increase in volume, which signals the potential end of a trend. Participants who waited and are afraid of missing more of the move pile in at market tops , exhausting the number of buyers.
At a market bottom , falling prices eventually force out large numbers of traders, resulting in volatility and increased volume. We will see a decrease in volume after the spike in these situations, but how volume continues to play out over the next days, weeks, and months can be analyzed using the other volume guidelines.
Volume can be useful in identifying bullish signs. For example, imagine volume increases on a price decline and then the price moves higher, followed by a move back lower. If the price on the move back lower doesn't fall below the previous low, and volume is diminished on the second decline, then this is usually interpreted as a bullish sign.
After a long price move higher or lower, if the price begins to range with little price movement and heavy volume, this might indicate that a reversal is underway, and prices will change direction.
On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout indicates a lack of interest and a higher probability for a false breakout. Volume should be looked at relative to recent history. Comparing today to volume 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant they are likely to be.
Volume is often viewed as an indicator of liquidity, as stocks or markets with the most volume are the most liquid and considered the best for short-term trading; there are many buyers and sellers ready to trade at various prices. Volume indicators are mathematical formulas that are visually represented in most commonly used charting platforms.
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Table of Contents Expand. Table of Contents. Buying Volume. Selling Volume. Relative Volume. Higher Volume. Analyzing Stock Price Movements. The Final Word. By Cory Mitchell. Cory Mitchell, Chartered Market Technician, is a day trading expert with over 10 years of experience writing on investing, trading, and day trading for publications including Investopedia, Forbes, and others. Learn about our editorial policies. Reviewed by Gordon Scott. Article Reviewed October 20, Learn about our Financial Review Board.
Key Takeaways Buy volume, when buyers have control, happens at the offer price, which is the lowest advertised price sellers will accept. Sell volume, when sellers have more control, happens at the bid price, which is the highest advertised price buyers will offer.
Volume typically appears at the bottom of a stock price chart as vertical bars that represent how many shares changed hands over time. Days with higher-than-usual volume usually have large, volatile changes in price and indicate something is happening with the stock.
There are several other volume charts that depend on the time period means they show hourly, daily, monthly, volume charts. The stock volume shows that activity has taken its position in a stock market. Thus, whether an investor buys or sells a share, all the activity is recorded in the volume metric. If there is a huge volume of a particular stock, it means several activities are happening around that stock, or the interest of this stock is very high.
The activity can result in positive and negative also, which means there could be negative talking about a stock, which can reverse the volume of a stock. High volume tells the investors the number of timeshares that have been exchanged in the stock market. Hence, the volume in the share market tests liquid and market activity. Liquidity means the investor can get back their money easily when there is a sell order. When there is a high volume in the market, it means there are more sellers and buyers in the market.
In a single trading session, the volumes remain high during the opening and closing of a session as intraday traders book and close their positions in a hurry before the session ends. Trading volume is considered beneficial for short-term intraday traders. This tool helps the investors who use fundamental analysis in a trading session.
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