Volume Analysis

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. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.

It is the basic yet important analysis of volume that provides investors with an element of technical analysis. Volume can provide valuable clues as to the intensity of a given price move. During consolidation periods, low volume levels generally prevail.

Calculations

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.

Sample Chart

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.

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. 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.

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.

The strategies described in this article are for information purposes only, and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.