Stock Volume Indicators

What is Stock Volume? Volume is the number of shares or contracts that change hands between a buyer and a seller (trades) over a given period of time, which is usually a day. The more active the security, the higher the volume will be (and vice versa).

Stock volume bars are located at the bottom of most technical analysis charts and they are used by chartists to determine the daily up or down movements of the stock.

Volume Chart

The Importance of Volume in Technical Analysis

Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Whenever the price of a stock increases or decreases with relatively high volume, it is viewed as a stronger, more relevant move. If the stock price fluctuates in a similar manner but the volume is relatively low, then the move is sufficiently weaker. This is why it’s important to analyze both the price movement as well as the volume in order to get a clearer picture of the stock’s pattern.

Technical analysis of a stock’s volume helps traders determine if certain situations are occurring, such as a true trend reversal. An example of this is when a stock jumps 5% in one trading day after being in a long downtrend. If volume is high during the day relative to the average daily volume, it is a sign that it is reversing its trend. On the other hand, if the volume is below average, there may not be enough indication to support a true trend reversal.

Stock volume should move in accordance with the trend. If prices are moving in an upward trend, volume should increase and if prices are moving in a downward trend, the volume should also decrease. 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.

Stock Volume Indicators and Chart Patterns

Stock volume indicators are also used to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed through stock volume analysis. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists but, 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.

In Technical Analysis, Volume Precedes Price

Another important belief in technical analysis is that a security’s price is preceded by its volume. Stock volume is closely monitored by technicians and chartists to form predictions of upcoming trend reversals. An example of this belief is when volume is starting to decrease in an uptrend, it is usually recognized as a sign that the upward run is about to end.

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Next: Technical Analysis: Stock Charts