1. Technical Analysis: Introduction
  2. Technical Analysis: The Basic Assumptions
  3. Technical Analysis: Fundamental Vs. Technical Analysis
  4. Technical Analysis: The Use Of Trend
  5. Technical Analysis: Support And Resistance
  6. Technical Analysis: The Importance Of Volume
  7. Technical Analysis: What Is A Chart?
  8. Technical Analysis: Chart Types
  9. Technical Analysis: Chart Patterns
  10. Technical Analysis: Moving Averages
  11. Technical Analysis: Indicators And Oscillators
  12. Technical Analysis: Conclusion

The only metric that we’ve discussed so far in this tutorial is the price, but there are other non-price factors that are equally as important – including volume.

What is Volume?

Volume is simply the number of shares or contracts that trade over a given period – usually a day. Often times, volume is expressed as a bar chart directly below the price chart with the bars height illustrating how many shares have traded per period. Volume charts can also be analyzed to show trends of increasing or decreasing volume over time. (For further reading, see Price Patterns – Part 3, Gauging Support and Resistance with Price by Volume).

Figure 8 – Volume on Chart – Source: StockCharts.com

Why Volume is Important?

Volume is used by technical analysts to confirm trends and chart patterns. The strength of any given price movement is measured primarily by the volume. In fact, a 50% rise in a stock price may not be all that relevant at all if it occurs on very little volume – just look at penny stocks.

For example, suppose that a stock jumps 5% in one trading day after being in a long-term downtrend. Is this a reversal of the long-term trend? The answer depends on whether there was a substantial amount of volume behind the move. If the volume was below average, the move was likely a fluke and the downtrend is likely to continue. On the other hand, if the volume was significantly higher than average, then it could be the start of a reversal. (To read more, check out Trading Volume – Crowd Psychology).

In addition to single day moves, the trend in volume over time can be related to price trends to determine if a stock is gaining or losing momentum. An example might be a stock that has been trending higher with declining volume, which suggests that the rally may be losing momentum. In that case, traders may want to be on the lookout for a reversal and perhaps reduce or sell their long positions in preparation. This is known as divergence. (For additional insight, read Divergences, Momentum, and Rate of Change).

Volume and Chart Patterns

Volume is invaluable when confirming chart patterns, such as head and shoulders, triangles, flags, and other patterns. These chart patterns will be discussed in greater detail later on, but for now, know that chart patterns try to predict pivotal moments – like reversals. If volume isn’t present alongside these chart patterns, then the resulting trading signal isn’t as reliable.

Volume Precedes Price

A final important concept to understand is that price is preceded by volume. Technical analysts closely watch volume to see when reversals are likely to occur, which means that volume changes can be a precursor to price changes. If volume is decreasing in an uptrend, it could signal that the uptrend is coming to a close and a reversal may be likely.

Now that we have a better understanding of some of the most important core elements of technical analysis, we will move on to charts, which help identify trading opportunities in price movements.


Technical Analysis: What Is A Chart?
Related Articles
  1. Trading

    How to Use Volume to Improve Your Trading

    Volume is a simple yet powerful way for traders and investors to increase profits and minimize risks.
  2. Trading

    Essential Strategies For Trading Volume

    Looking to trade using volume? Have a look at these essential tips.
  3. Trading

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  4. Trading

    Confirming Price Movements With Volume Oscillators

    Use this indicator to validate a change in price direction and moving averages.
  5. Trading

    How To Tackle Intraday Volume

    Measure the flow of intraday volume to estimate the emotional intensity of the crowd.
  6. Investing

    Using Volume Rate Of Change To Confirm Trends

    Wise traders rely on indicators that show a trend in volume, because without supportive volume, a price movement has no conviction.
  7. Trading

    A Guide To Finding The Most Actively Traded Stocks

    Knowing the trading volume of a stock helps traders understand price movements and forecast future movements. This short guide helps investors locate actively traded data.
  8. Trading

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  9. Investing

    Using Open Interest To Find Bull/Bear Signals

    Volume should inform your use of this indicator in confirming trends and reversals.
Frequently Asked Questions
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
  2. My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, $10,000 distributions?

    You and your spouse each qualify for a penalty-free distribution of up to $10,000 for the purchase, acquisition or construction ...
  3. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
  4. Who manages the assets in a Roth 401(k) account?

    Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...
Trading Center