Volume and Price Movement

To be honest I don't use volume that much when I am trading, and I believe if  you didn't even look at it you could trade successfully without it.  It can be useful at the right places.

So what it is volume?

It is the number of shares that are traded during a certain time period.

I equate volume with interest.  If the stock has high volume there some sort of interest in it, if it has low volume there is, obviously little interest in the stock.

The volume is really just telling us that there is high or low interest in a certain stock.

Volume and Liquidity.

One of the most important features of trading stocks is that there is the ability to buy or sell quickly.  When there is high volume it means the stock is very liquid (you can buy or sell it quickly).  When there is low volume it may be difficult to buy or sell and that is not a good situation to be stuck with something you cannot get rid of.

As a trader you want to stick with high volume stocks you can find better trade set ups.  I usually like to trade stocks that have more than 1 million shares traded on average.



Here are a couple of volume patterns to keep an eye on.

1.  The stock is heading up (green rectangle)  often when stocks rise there is not alot of volume with it and that reflects about average interest.  At this point in the stock there is nothing exciting going on.

2. The stock rebounds (red circle) in this case if the stock rebounds and the volume is drying up on the way up there is little interest and that can lead to the stock reversing.

3. The stock bottoms (green circle)  when the stock has come down there is usually a spike of volume and that indicates there is interest and this often where a trend might change.

Don't think of volume as buying and selling volume.  There is no such thing.  If people are buying there is going to be an equal amount of people selling and vice versa.  What you can use volume for is to gauge interest at important swing points.

 Price & Volume

When you combine price and volume it is much more effective and there are certain patterns to look out for.

1. Narrow Trading Range with Price Expansion -  When a stock enters into a narrow price range with low volume (green rectangle) eventually if price expands and the volume also expands it usually is a good indication that there is a lot of interest at the point of the break out.  If you notice below the price during the narrow range pulled back to a moving average always a good entry area.

2. Volume Expansion With Narrow Price Range - This type of behavior usually happens during an accumulation or distribution period, where institutions are buying heavily but the price is not moving much.  This kind of activity will usually lead to a reversal of a trend.



Volume is a difficult thing to interpret, so the best thing is to focus on the price action.  Price is the most important thing on the chart everything else is derived from price.