The Volume indicator is a key tool in technical analysis that measures the number of shares, contracts, or lots traded in a security or market during a given period. Volume reflects the activity level and the liquidity of an asset, and it can provide important signals about the strength or weakness of a price move.
Volume Bars:
- Volume is typically displayed as vertical bars at the bottom of a price chart. Each bar represents the total volume traded during a specific time period (e.g., 1 minute, 1 hour, 1 day).
- The height of the bar indicates the total volume: taller bars represent higher trading activity, while shorter bars represent lower activity.
Volume Moving Average:
- Some traders use a moving average of volume to smooth out fluctuations and identify trends in trading activity over time.
- For example, a 20-day volume moving average can help traders see if current volume is higher or lower than the average over the last 20 days.
Confirming Trends:
- Rising Volume with Rising Price: When the price of an asset is increasing and volume is also increasing, it is generally seen as a confirmation that the upward trend is strong and likely to continue. High volume indicates strong buying interest.
- Rising Volume with Falling Price: Conversely, if the price is decreasing and volume is increasing, it suggests that the downward trend is strong and may continue. High volume indicates strong selling interest.
Volume Spikes:
- Bullish Volume Spike: A sudden increase in volume with a significant price rise can indicate a strong bullish sentiment, potentially signaling the start of a new upward trend or the continuation of an existing one.
- Bearish Volume Spike: A sudden increase in volume with a significant price drop can indicate strong bearish sentiment, potentially signaling the start of a new downward trend or the continuation of an existing one.
Divergence:
- Price-Volume Divergence: If price is rising but volume is declining, it may suggest that the upward trend is losing momentum and could be near exhaustion, potentially signaling a reversal. The same applies to a falling price with declining volume.
- Volume Climax: Sometimes, extreme spikes in volume can signal the climax of a trend. For example, if a strong uptrend suddenly experiences a massive spike in volume, it might indicate that the trend is about to reverse as all the buyers have entered the market.
Breakouts:
- High Volume Breakout: When an asset breaks out of a significant support or resistance level with high volume, it is often seen as a strong confirmation of the breakout. High volume suggests that many traders are participating, making the breakout more likely to sustain.
- Low Volume Breakout: If a breakout occurs with low volume, it may suggest a lack of conviction among traders, increasing the risk that the breakout will fail, and the price will return to its previous range.
Volume and Candlestick Patterns:
- Volume can also be used to confirm or refute the significance of candlestick patterns. For example, a bullish reversal candlestick pattern like a hammer is more significant if it occurs with high volume, suggesting strong buying interest.
Suppose you're analyzing a stock that is trading near a significant resistance level. If the stock breaks above this resistance on high volume, this could be a strong signal to buy, as the high volume confirms the strength of the breakout. Conversely, if the stock breaks above resistance on low volume, you might be cautious, as the breakout might lack the conviction needed to sustain the move.
Similarly, if a stock is in a downtrend but you notice that the volume is decreasing as the price continues to fall, this might suggest that the selling pressure is weakening, and a reversal could be imminent. Conversely, if volume starts to increase during the downtrend, it might suggest that the selling pressure is gaining strength, and the downtrend could continue.