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Volume is an important tool in technical analysis because it shows how much trading activity is happening in the market. By studying volume, traders can better understand the strength behind price movements.
In this lesson, you’ll learn what trading volume is, how it relates to price movements, the basics of volume indicators, and how traders use volume to confirm trends.
Trading volume refers to the number of shares, contracts, or units of an asset that are traded during a specific time period.
Higher volume means that many traders are actively buying and selling the asset, while lower volume indicates less market activity.
Example: If a stock has a daily volume of 1 million shares, it means that 1 million shares were traded during that trading day.
Volume is usually displayed as bars below a price chart, with taller bars representing higher trading activity.
Volume helps traders understand the strength behind price movements.
When price changes are supported by strong volume, the move is generally considered more reliable.
Here are some common relationships between price and volume:
This usually signals strong buying interest and may indicate a strong upward trend.
This suggests strong selling pressure and may indicate a strong downward trend.
When price moves with low volume, the movement may be weak and less reliable.
By analyzing volume alongside price, traders can better judge whether a trend is strong or losing momentum.
Volume indicators help traders analyze trading activity more clearly. These tools use volume data to provide additional insights into market strength.
Some commonly used volume indicators include:
On-Balance Volume (OBV) tracks buying and selling pressure by adding volume during upward moves and subtracting volume during downward moves.
Shows the average trading volume over a specific period, helping traders identify unusual spikes in activity.
Helps determine whether traders are accumulating (buying) or distributing (selling) an asset.
These indicators help traders better understand how volume is influencing price movements.
Volume is often used to confirm trends and breakout signals.
For example:
If price is rising and volume is also increasing, it suggests that the upward trend is strong.
When price breaks above a resistance level with high volume, the breakout is more likely to be genuine.
If price is moving higher but volume is declining, the trend may be losing strength and could reverse.
Because of this, many traders use volume as a confirmation tool alongside other technical analysis methods.
Trading volume represents the amount of market activity during a specific period.
High volume often indicates strong market interest.
The relationship between price and volume helps traders judge trend strength.
Volume indicators like OBV and volume averages help analyze trading activity.
Traders often use volume to confirm trends and breakouts.
In the next lesson, you’ll learn about chart patterns, which help traders identify potential continuation and reversal signals in the market.
Our easy-to-use glossary breaks down complex trading terms into plain English. Learn the key terms every trader needs to know.
