Volume is one of the most important but often overlooked aspects of technical analysis. Volume momentum helps traders confirm whether price moves are genuine or likely to fail. Understanding the relationship between volume and price is essential for making better trading decisions.
What is Volume Momentum?
Volume momentum measures the force behind price movements. It looks at whether volume is increasing or decreasing in relation to price changes, helping traders assess the conviction behind market moves.
Volume principle: Volume should confirm price. Rising prices on increasing volume suggest strong buying pressure. Falling prices on increasing volume suggest strong selling pressure. Moves on light volume are often unreliable.
Key Volume Momentum Indicators
On-Balance Volume (OBV)
Cumulative volume indicator:
- Adds volume on up days, subtracts on down days
- Rising OBV = accumulation (buying)
- Falling OBV = distribution (selling)
- Divergences can signal reversals
Volume Rate of Change
- Compares current volume to past volume
- Identifies volume surges and contractions
- High values indicate unusual interest
- Useful for breakout confirmation
Chaikin Money Flow (CMF)
- Measures buying and selling pressure over time
- Positive values = buying pressure dominates
- Negative values = selling pressure dominates
- Oscillates between -1 and +1
Volume Confirmation Patterns
Healthy Uptrend Volume
- Volume increases on up days
- Volume decreases on pullback days
- OBV making higher highs with price
- Indicates strong institutional buying
Bullish Volume Example
A stock breaks out above resistance on volume 200% above average.
Over the next week, it pulls back on declining volume.
It then resumes the advance on another volume surge.
This pattern of expanding volume on advances and contracting volume on pullbacks confirms the uptrend.
Healthy Downtrend Volume
- Volume increases on down days
- Volume decreases on rally attempts
- OBV making lower lows with price
- Indicates distribution by institutions
Volume Divergences
Bullish Volume Divergence
Price makes lower lows but volume indicators show improvement:
- OBV making higher lows while price makes lower lows
- Less volume on new price lows
- Suggests selling exhaustion
- May precede a reversal higher
Bearish Volume Divergence
Price makes higher highs but volume indicators weaken:
- OBV making lower highs while price makes higher highs
- Declining volume on new price highs
- Suggests buying exhaustion
- May precede a reversal lower
Warning: Context Matters
Volume patterns mean different things in different contexts. A volume spike during a panic sell-off is different from a volume spike on a breakout. Always consider the broader market environment and the stock's recent history when interpreting volume.
Volume at Key Levels
Breakout Volume
- Valid breakouts should have above-average volume
- Look for at least 50% above average volume
- Ideal breakouts have 100%+ above average volume
- Low volume breakouts often fail
Support and Resistance Volume
- Bounces off support should have increasing volume
- Rejections at resistance should have high volume
- Light volume tests may not hold
- Volume confirms level significance
Accumulation and Distribution
Signs of Accumulation
- Heavy volume on up days
- Light volume on down days
- Stock holds gains well
- OBV trending higher
- Often precedes breakouts
Signs of Distribution
- Heavy volume on down days
- Light volume on up days
- Stock struggles to hold gains
- OBV trending lower
- Often precedes breakdowns
Volume Trading Strategies
Volume Breakout Strategy
- Identify consolidation patterns near resistance
- Wait for breakout on heavy volume
- Enter on the breakout day or first pullback
- Set stop below the breakout level
Volume Dry-Up Strategy
- Find stocks that have pulled back on declining volume
- Look for volume to dry up completely (low volume days)
- Enter when volume returns and price turns up
- The lack of selling pressure suggests the pullback is ending
Analyze Your Trading Volume Patterns
Pro Trader Dashboard helps you track volume characteristics in your winning and losing trades.
Summary
Volume momentum is essential for confirming price moves and identifying accumulation or distribution. Use indicators like OBV and CMF to track buying and selling pressure over time. Pay attention to volume on breakouts, at support and resistance levels, and during trend moves. Strong volume confirms conviction while weak volume warns of potential failure.
Learn more: Relative Strength Analysis and Price Momentum Trading.