Volume is the overall sum of all transactions executed in the market (or a single company's stock) during a given period of time, which shows us market power (importance). The greater the volume, the more powerful the market. Volume plays a significant role in the confirmation of a suggested price movement.
In order to confirm the trend, volume should increase when the price moves with the trend and decrease when the price moves against the trend. When the market is in an uptrend volume should rise when price increases and fall when price decreases. The upturn is strengthened when buyers are willing to buy shares despite the rising price because they believe that upward momentum will continue. When volume moves against price it means the trend is weak. Low volume during an uptrend means that buyers do not believe that this trend will hold much longer.
To show you this phenomenon more clearly here is an example:
You will notice that from November to January there was an uptrend in price with a concomitant uptrend in volume, indicating that demand was rising. It is worth mentioning that in January volume was rising and falling with price, which confirmed the uptrend. However, the situation was different between February and March. At point 1 you can see that a price top appeared with a high volume value, but from point 1 to point 2 price was still rising and volume was falling. The same situation occurred between points 2 and 3. Despite prices reaching new tops, declining volume was a sign of a weakening uptrend. As you can see between March and April there was a strong downturn.
The conclusion that should be drawn from this example is quite obvious. Trend analysis of price alone does not give us the whole picture of the market, but supplementing it with volume analysis can give a far better evaluation of real supply and demand in the market, and can reveal trend strength or weakness.
However, there is still the possibility that the market will continue its upward trend. This situation can occur when buyers start to leave the market or become sellers. It works also the other way around. Volume analysis is an elaborate issue, but it is worthy of attention so we use volume analysis in our tools.Back