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


By Cory Janssen, Chad Langager and Casey Murphy

To this point, we've only discussed the price of a security. While price is the primary item of concern in technical analysis, volume is also extremely important.

What is Volume?
Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do. (For further reading, see Price Patterns - Part 3, Gauging Support And Resistance With Price By Volume.)


Why Volume is Important

Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Therefore, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story.

Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal. (To read more, check out Trading Volume - Crowd Psychology.)

Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end.



When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume. (For additional insight, read Divergences, Momentum And Rate Of Change.)

Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened.

Volume Precedes Price
Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.

Now that we have a better understanding of some of the important factors of technical analysis, we can move on to charts, which help to identify trading opportunities in prices movements.

Technical Analysis: What Is A Chart?

Related Articles
  1. Trading

    Interpreting Volume For The Futures Market

    Learn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
  2. 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.
  3. Trading

    How To Use Volume To Improve Your Trading

    Volume is a simple yet powerful way for traders and investors to increase their profits and minimize risks.
  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. 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.
  7. 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.
  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.
Trading Center