Volume is one of the most important but often overlooked aspects of technical analysis. It shows the strength behind price movements and can confirm or question what price is telling you. Here is how to use volume analysis.
What is Volume?
Volume is the number of shares (or contracts) traded in a given period. High volume means lots of participation. Low volume means less interest.
Key principle: Price tells you what is happening. Volume tells you how significant it is. Big moves on big volume are more meaningful than big moves on low volume.
Volume Basics
- High volume: Strong conviction in the move
- Low volume: Weak conviction, move may not last
- Rising volume: Increasing interest
- Falling volume: Decreasing interest
Volume Confirmation
Volume should confirm price movements:
- Uptrend + rising volume: Healthy, likely to continue
- Uptrend + falling volume: Warning sign, momentum fading
- Breakout + high volume: Confirms the breakout
- Breakout + low volume: Potential false breakout
Volume Confirmation Example
Stock breaks above resistance at $50.
Volume is 3x the average. This confirms strong buying interest.
The breakout is more likely to be real and continue higher.
Volume Divergence
When volume does not confirm price, it is a warning:
- Price new high + lower volume: Bearish divergence, rally may fail
- Price new low + lower volume: Bullish divergence, selling may be exhausted
Volume Patterns
Volume Spike
A sudden increase in volume often signals:
- Climax move (potential reversal)
- Breakout confirmation
- Institutional activity
Volume Dry-Up
Very low volume often precedes big moves. Consolidation on low volume followed by volume expansion can signal a breakout.
Volume Indicators
On-Balance Volume (OBV)
Running total of volume based on price direction:
- Price up = volume added
- Price down = volume subtracted
- Rising OBV = buying pressure
- Falling OBV = selling pressure
Volume Profile
Shows where most volume traded at different price levels. High volume areas act as support/resistance.
Volume Trading Tips
- Always compare current volume to average volume
- Look for volume to confirm breakouts
- Be cautious of moves on low volume
- Watch for volume divergences as warning signs
- Use volume to time entries and exits
Track Your Volume-Based Trades
Pro Trader Dashboard helps you analyze how volume affects your trading results.
Summary
Volume confirms the significance of price moves. High volume confirms trends and breakouts. Low volume suggests weak conviction. Watch for volume divergences as warning signs of potential reversals. Always consider volume alongside price for a complete picture.
Learn more: support and resistance and reading stock charts.