Volume is an important technical analysis tool to learn and understand how to apply to price movements. This quick illustrated introduction will help you understand the concept of volume as it is used by traders to analyze markets.
Contents
Importance of Volume when Analyzing Price Movements
How to Get Started Trading
Further Reading
Volume increases every time a buyer and seller transact their stock or futures contract. If a buyer buys one share of stock from a seller, then that one share is added to the total volume of that particular stock.
Volume has two major premises:
When prices rise or fall, an increase in volume acts as confirmation that the rise or fall in price is real and that the price movement had strength.
When prices rise or fall and there is a decrease in volume, then this might be interpreted as being a weak price move, because the price move had very little strength and interest from traders.
The chart below of Gold futures shows a strong trend being confirmed by a strong increase in volume:
The chart above of Gold shows that when prices began making new highs, volume increased. As the price of Gold increased, more and more buyers (buying pressure) appeared to jump on board the trend.
Likewise, if prices are heading downward and are making new lows and volume increases, the sellers are becoming more and more interested as price falls (increased selling pressure).
Importance of Volume when Analyzing Price Movements
The following is an extreme illustration of the importance of volume:
A buyer places a market buy order after hours for 10 shares of stock. The transaction occurs one dollar above the closing price. Therefore, the one dollar price move had 10 shares worth of interest from a buyer.
A buyer places a buy order for 100,000 shares of stock. This transaction takes place at a price that is one dollar above the current price.
Which example is more bullish? They both increase the last transaction price by one dollar. If a trader didn’t use volume, he/she would think that the move was identical from a price chart perspective.
Of course, the second example is more bullish because the one dollar more the buyer of the 100,000 shares is willing to pay is significant (the buyer is bullish and is taking a large bet to prove it); whereas, in the second example, 10 shares is insignificant.
Increases or decreases in price along with increased volume isn’t always confirming of trend. Volume blow-offs are discussed on the next page.
Volume Spikes & Blowoffs
Extreme increases in volume along with extreme rises or falls in price can sometimes be interpreted opposite to regular volume analysis:
Sharp increases in price and sharp increases in volume can mean bulls have been exhausted, all buyers have bought and there is no one else but sellers; the result is bearish.
Sharp decreases in price and sharp increases in volume can mean that everyone that wanted to get out of the stock or future has; therefore, there are only buyers left – bullish sign.
The chart below of eBay (EBAY) stock illustrates a volume spike, defined as at least two times the average volume:
Volume extremes may occur at bottoms as well, which is shown below in the chart of the Nasdaq 100 QQQQ’s:
A strong understanding of volume is a good addition to price analysis skills. Being able to see when price increases or decreases have firm support or knowing when either buyers or sellers have been exhausted might prove useful when trading.
Another way of visualizing volume is Volume Rate of Change (see: Volume Rate of Change) and the Volume Oscillator (see: Volume Oscillator). Also seeVolume Accumulation.
How to Get Started Trading
If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting & analysis tools they offer:
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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Further Reading
Learn more about technical analysis indicators, concepts, and strategies including Momentum, Elliot Waves, Market Thrust, Moving Averages, and Average Directional Movement.
If you’d like a primer on how to trade commodities in general, please see our introduction to commodity trading here.
For example, if an uptrend is accompanied by increasing volume, it suggests a strong and healthy trend. Conversely, if an uptrend is accompanied by decreasing volume, it may indicate a weakening trend.
Long Volume-by-Price bars underneath prices should be watched as potential support during a pullback. Similarly, long Volume-by-Price bars above prices should be watched as potential resistance on a bounce. Price breaks above or below long Volume-by-Price bars can also be used as signals.
Volume indicators indicate the perception of investors about a specific stock by measuring the number of traders that are interested in buying or selling it at a given point. If it indicates a negative perception, it means that the price of a stock can decline shortly, and it can show a bearish pattern.
Volume Price Analysis (VPA) is measured vertically and over a specific period. The most well-known example of VPA would be the regular volume bars on a Japanese candlestick chart or American bar chart. Another type of VPA would be the popular moving average known as the Volume Weighted Average Price (VWAP) indicator.
When we plot the swing price volume indicator, a line connecting the significant swing points is drawn on the chart. In the case of a swing move, the high or low mark is marked and the price changes direction. For the last swing, the AV (Average volume) is displayed at the high or low.
Trend Confirmation: If the PVT increases with the price, it confirms the uptrend. ...
Divergence: If the PVT increases, but the price decreases, it indicates a bullish divergence, suggesting the stock may be undervalued and be a good buying opportunity.
Volume analysis involves examining relative or absolute changes in an asset's trading volume to make inferences about future price movements. Volume can be an indicator of market strength, as rising markets on increasing volume are typically viewed as strong and healthy.
There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume.
The on-balance volume (OBV) is one the most useful indicators in TradingView and helps to know the buying and selling activities in the listed stock or market index. OBV indicator is calculated by adding volume when the asset closes higher and subtracting the volume when the asset ends lower.
Also look for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting. On weekly charts, look for weeks with above-average or sharply higher volume than in the previous week.
Any level of volume that provides investors with specific insight into a security's price action (and a sense of the trading interest in that security) can be thought of as a good trading volume.
If the price of a security is rising but the trading volume is decreasing, it may indicate that the trend is losing momentum and a reversal could be imminent. Conversely, if the price is falling but trading volume is increasing, it may indicate that a trend reversal or breakout is coming.
Volume pricing is a pricing strategy in which an item's price per unit decreases as the purchase quantity increases. This practice, which incentivizes customers to buy larger amounts of a product, is common in wholesale and retail markets.
Volume by price strategy plots the currency pair's volume on the vertical axis. This provides traders with an idea about the volume that has been traded for the currency pair at different price levels. It also helps in identifying extreme volume areas that depict key support and resistance price levels.
Volume Price Analysis (VPA) is a trading methodology that focuses on analyzing the relationship between volume, price, and price action in financial markets.
An uptrend paired with increasing and/or above average volume implies investor enthusiasm for that stock or asset is strong, which could lead to more buying and even higher prices.
What Is Volume Profile? A volume profile, depicted by a volume-by-price (VbP) chart, is a trading indicator that displays the total volume traded at each price level over a specified period of time. The volume profile may be based on the visible range, which is the period of time that is currently visible on the chart.
However, in the options market, volume in a particular contract can either open or close out outstanding contracts. Volume is what makes option prices move up or down. It is also a great way for option traders to gauge the liquidity of a particular contract. The higher the volume, the more liquidity the contract has.
High or increasing volume in an uptrend can signal a buying opportunity. Decreasing volume in an uptrend may suggest that it's time to sell and take profits. High or increasing volume in a downtrend can signal that it's best to stay on the sidelines.
Introduction: My name is The Hon. Margery Christiansen, I am a bright, adorable, precious, inexpensive, gorgeous, comfortable, happy person who loves writing and wants to share my knowledge and understanding with you.
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