Wednesday, April 14, 2021
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Importance of Volume in Technical Analysis

 

What is the role of Volume in Technical Analysis?

Volume is one of the most important necessities in Technical Analysis. Volume can provide the needed information about a stock. This include the price of that stock over a time period, how many hands exchanged the stocks and more. Furthermore, volume can also help us in confirming the price trends, spot potential reversals and breakouts. No stock is similar and has a varying amount of outstanding shares. Therefore, volume must be compared to the stock’s historical volume. The Volume and the  OBV are using to check the trend of price moves most of the times.

HOW TO USE VOLUME IN ANALYZING STOCK PRICE MOVEMENTS

Generally, keeping track of volume can help in determining the stock price movements. There are 3 ways to use volume in price movements.

  • Confirming Trends.
  • Spotting of Price Reversals.
  • Confirming Price Breakouts.

CONFIRMING TRENDS

Rising volume displays the opinion of sellers and buyers about increasing or decreasing the price. For example, when the trend goes up and the volume increases with the price, it shows buying interest. When you are in a bullish spot, the increasing volume can certify the continuation of uptrend. Otherwise, it could indicate that the trend will continue to rise and it is time for you to get out of the short position.

Ordinarily, the decrease in volume along with the increase in prices shows the weakening of trend. When the price moves in the direction of trend, volume should be larger. When it moves against the trend, volume should be lower. This indicates the strong movement in the direction of trend and the weak pullbacks. Consequently, it makes the trend to continue.

SPOTTING OF PRICE REVERSALS

When it comes to spotting the relevant price reversals, determining exhaustion move is necessary. Specifically, exhaustion move is a scheme in which a stock rises with lower volumes and touches the peak with higher Volume.

. This could show the end of the ongoing trend.

CONFIRMING PRICE BREAKOUTS

In case of a stock with powerful Resistance/Support levels, volumes can help in verifying breakouts. An increase in volume with a price above the Resistance level shows the possibility of a bullish breakout. Lower volumes with a break after the resistance or before support shows the failure of breakout.

When the volume does not confirm the breakout, you should never buy the upside breakout or sell the downside breakout. It is indeed a common mistake in Technical Analysis.

In conclusion, we could say that volume is one of the important indicators. It can confirm the breakouts, price trends, price movements and more.

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