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Volume is an important technical analysis tool to learn and understand how to apply to price movements.

Volume increases every time a buyer and seller transact their stock or futures contract. If a buyer buys one share of stock from a seller, then that one share is added to the total volume of that particular stock.

Volume has two major premises:

  1. When prices rise or fall, an increase in volume acts as confirmation that the rise or fall in price is real and that the price movement had strength.
  2. When prices rise or fall and there is a decrease in volume, then this might be interpreted as being a weak price move, because the price move had very little strength and interest from traders.

The chart below of Gold futures shows a strong trend being confirmed by a strong increase in volume:

Price breakouts should be accompanied by increases in volume

The chart above of Gold shows that when prices began making new highs, volume increased. As the price of Gold increased, more and more buyers (buying pressure) appeared to jump on board the trend.

Likewise, if prices are heading downward and are making new lows and volume increases, the sellers are becoming more and more interested as price falls (increased selling pressure).

Importance of Volume when Analyzing Price Movements

The following is an extreme illustration of the importance of volume:

  • A buyer places a market buy order after hours for 10 shares of stock. The transaction occurs one dollar above the closing price. Therefore, the one dollar price move had 10 shares worth of interest from a buyer.
  • A buyer places a buy order for 100,000 shares of stock. This transaction takes place at a price that is one dollar above the current price.

Which example is more bullish? They both increase the last transaction price by one dollar. If a trader didn't use volume, he/she would think that the move was identical from a price chart perspective.

Of course, the second example is more bullish because the one dollar more the buyer of the 100,000 shares is willing to pay is significant (the buyer is bullish and is taking a large bet to prove it); whereas, in the second example, 10 shares is insignificant.

Increases or decreases in price along with increased volume isn't always confirming of trend. Volume blow-offs are discussed on the next page.

Volume Spikes & Blowoffs

Extreme increases in volume along with extreme rises or falls in price can sometimes be interpreted opposite to regular volume analysis:

  • Sharp increases in price and sharp increases in volume can mean bulls have been exhausted, all buyers have bought and there is no one else but sellers; the result is bearish.
  • Sharp decreases in price and sharp increases in volume can mean that everyone that wanted to get out of the stock or future has; therefore, there are only buyers left – bullish sign.

The chart below of eBay (EBAY) stock illustrates a volume spike, defined as at least two times the average volume:

volume buying exhaustion

Volume extremes may occur at bottoms as well, which is shown below in the chart of the Nasdaq 100 QQQQ's:

volume spikes may occur at bottoms

A strong understanding of volume is a good addition to price analysis skills. Being able to see when price increases or decreases have firm support or knowing when either buyers or sellers have been exhausted might prove useful when trading.

Another way of visualizing volume is Volume Rate of Change (see: Volume Rate of Change) and the Volume Oscillator (see: Volume Oscillator).

The information above is for informational and entertainment purposes only and does not constitute trading advice or a solicitation to buy or sell any stock, option, future, commodity, or forex product. Past performance is not necessarily an indication of future performance. Trading is inherently risky. Commodity.com shall not be liable for any special or consequential damages that result from the use of or the inability to use, the materials and information provided by this site. See full disclaimer.

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