Volume Analysis

DEFINITION of 'Volume Analysis'

Volume analysis is the examination of the number of shares or contracts of a security that have been traded in a given time period. Volume analysis is used by technical analysts as one of many factors that inform their trading decisions. By analyzing trends in volume in conjunction with price movements, investors can determine the significance of changes in a security's price.

BREAKING DOWN 'Volume Analysis'

Volume analysis is done by all types of analysts following specific securities in the financial markets. Generally, volume refers to the number of shares transacted per day. Having an understanding of the entire market’s trading volume versus the volume of a single holding can be one important comparison that helps analysts to discern volume trends.

Volume Inferences

Oftentimes, high volumes of trading can infer a lot about investors’ outlook on a market or security. A significant price increase along with a significant volume increase, for example, could be a credible sign of a continued bullish trend or a bullish reversal. Adversely, a significant price decrease with a significant volume increase can be a sign for a continued bearish trend or a bearish trend reversal. (See also: How to Use Volume to Improve Your Trading)

In general, it can be important for technical analysts to include volume charts in daily charting diagrams. Volume charts are usually available below a standard candlestick graph. These charts will also usually display moving average trendlines. Incorporating volume into a trading decision can help an investor to have a more balanced view of all the broad market factors that could be influencing a security’s price which helps an investor to make a more informed decision

Volume Indicators

In technical analysis there are two indicators designed specifically to support investors that incorporate volume into their trading decisions. The Positive Volume Index (PVI) and Negative Volume Index (NVI) were developed by Paul Dysart in the 1930s. These indexes increased in popularity in 1975 when they were discussed in a 1976 book titled "Stock Market Logic" by Norman Fosback.

The PVI and NVI are both based on the previous day’s trading volume and a security’s market price. When trading volume increases from the previous day the PVI is adjusted. When trading volume decreases from the previous day the NVI is adjusted. These basic index calculations show how volume is affecting price. When PVI increases or decreases it means that price changes are being driven by high volumes. Conversely, when NVI increases or decreases it means that prices are fluctuating with little affect from volume.

Positive Volume Index:

If current volume is greater than the previous day's volume, PVI = Previous PVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous PVI}. If current volume is lower than the previous day's volume, PVI is unchanged.

Negative Volume Index:

If current volume is less than the previous day’s volume, NVI = Previous NVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous NVI}. If current volume is higher than the previous day's volume, NVI is unchanged.

Many investors believe that noise trading is a significant factor for the Positive Volume Index. Therefore, the Negative Volume Index is often followed for its insight on professional traders market activity.