What Is Volume?

Volume is the number of shares of a security traded during a given period of time.

Key Takeaways

  • Volume is the number of shares of a security traded during a given period of time.
  • Volume is an important indicator in technical analysis because it is used to measure the relative significance of a market move.
  • The higher the volume during a price move, the more significant the move and the lower the volume during a price move, the less significant the move.
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Volume

Understanding Volume

Every transaction that takes place between a buyer and a seller of a security contributes to the total volume count of that security. One transaction occurs whenever a buyer agrees to purchase what seller is offering for sale at a certain price. If only five transactions occur in a day, the volume for that day is set at five.

Some investors use technical analysis, a strategy based on stock price, in order to make decisions about when to buy a stock. Technical analysts are primarily looking for entry and exit price points; volume levels are important because they provide clues about where the best entry and exit points are located.

Volume is an important indicator in technical analysis because it is used to measure the relative significance of any market move. If the market makes moves a large amount during a given period, then the strength of that movement either gains credibility or is viewed with skepticism based on the volume for that period. The higher the volume during the price move, the more significant the move is considered in this form of analysis. Conversely, if the volume is low then the move is viewed with less significance.

Volume is one of the most important measures of the strength of a security for traders and technical analysts. From an auction perspective, when buyers and sellers become particularly active at a certain price, it means there is a high volume.

Analysts use bar charts to quickly determine the level of volume. Bar charts also make it easier to identify trends in volume. When the bars on a bar chart are higher than average, it's a sign of high volume or strength at a particular market price. By examining bar charts, analysts can use volume as a way to confirm a price movement. If volume increases when the price moves up or down, it is considered a price movement with strength.

If traders want to confirm a reversal on a level of support–or floor–they look for high buying volume. Conversely, if traders are looking to confirm a break in the level of support, they look for low volume from buyers. If traders want to confirm a reversal on a level of resistance–or ceiling– they look for high selling volume. Conversely, if traders are looking to confirm a break in the level of resistance, they look for high volume from buyers.