Volume

Definition

The Volume indicator is used to measure how much of a given financial asset has traded in a specific period of time. For example, with stocks, volume is measured by the traded shares. For futures, volume is based more on the number of contracts. By looking at volume patterns over time, traders can better understand the strengths of advances and declines in stocks as well as in markets in general.

Takeaways

As mentioned above, the Volume indicator measures the number of shares traded in a stock, whereas it measures the number of contracts traded in futures or options. The indicator can alert traders of market activity, sentiment, and trading activity in a specific asset. 

It’s important to note volume meaning in regards to market trends. When price falls while volume increases, this can show that a trend is gathering strength to the downside. If price reaches new highs or lows while volume decreases, this could mean that a potential reversal is on its way.

There are many technical analysis indicators that are based on volume, a few examples being the Klinger indicator, the On Balance Volume indicator, and the Volume Weighted Average Price.

What to look for

When using a volume-based indicator or analyzing volume in particular, there are a few ways to determine move strength or weakness. Many traders opt to join strong moves and neglect weak moves altogether, or even watch for an entry in the opposite direction of a move that shows weakness. The following are a few helpful guidelines that may prove useful when analyzing volume in trading decisions.

Confirming trends. A rising asset is sometimes met with rising volume. This is the case because buyers continue to require increasing numbers of shares and enthusiasm. Sometimes the opposite occurs and there’s an increase in price and a decrease in volume. This may suggest a lack of public interest and can serve as a warning for potential trend reversals. The main takeaway to remember here is this: a price rise or drop on a little volume has little meaning. It is not a significant enough signal to warrant trade action. Whereas on the other hand, a price rise or drop on a large volume is strong enough to warrant action as it alerts the trader that there has been a fundamental change in the stock.

Volume as it pertains to exhaustion moves. Exhaustion moves are evident regardless of whether or not the market is rising or falling. They are sharp moves in price that are combined with a simultaneous increase in volume. Additionally, they signal the potential end of a current trend. Traders who waited too long to participate in the move’s beginning are then afraid of missing more of the move and therefore move to pile in at market tops. This action exhausts the number of buyers, hence the name. Furthermore, volatility and increased volume can be a result of falling prices attempting to force out multiple traders when the amount of participants has become too much. This happens at market bottom. There’s a subsequent volume decrease after a spike of these occurrences, but volume can shift in the upcoming days, weeks, months or even years depending on the period analyzed.

Volume as it pertains to price reversals. Price reversals can often be spotted with help from the Volume indicator. This can occur after a long price move either higher or lower, when there is little price movement, but heavy volume. The type of occurrence can indicate a potential reversal and change in the price’s direction.

Volume as it pertains to breakouts (true and false). A rise in volume in coalition with an initial breakout from a range, or any other form of chart pattern, indicates a strength in the move. When there is little change in the volume or even decreasing volume on a breakout, it indicates a lack of interest and more potential for a false breakout to occur.

Volume and volume history. Volume should be considered alongside its history, but more importantly, its relevant and recent history. The more recent the history, the more effective and relevant the data will prove to be.

Summary

The Volume indicator measures how much of a given financial asset has traded in a specific period of time. Volume is measured by shares traded for stocks, whereas for futures, it is based on the number of contracts. Traders who use volume-based indicators are able to use the tool to their advantage in understanding the strengths of advances and declines in stocks as well as in markets in general. Volume is great for studying trends, with many ways to use the indicator. All in all, it helps identify market strength or weakness and can confirm price moves where they might point to a reversal.