Stock Volume : A Key Market Signal To Know

Stock volume points out important price levels. By carefully observing price action with the traded stock volume, you can also get a sense of which way the market or stock is headed. This is one of the most basic technical indicators that will give you an edge when trading stocks.  There are just a few major volume indications that should be studied. We will analyze exactly what is buying and selling volume,  how they define support /  resistance levels, and how volume can signal a major tuning point in stock trends.

Related Topics

Price Action

Support and Resistance

Moving Average

Chart Patterns

Stock Volume Definition

Volume is often referred as the number of shares that is being traded in a particular stock or financial instrument. It can be displayed in number format, or on a stock stock chart.  While this is just data showing numbers of shares traded, many traders use it as a technical indicator to complement other tools in technical analysis. Volume is a matter on interpretation and there are dozens of ways to use volume as an indicator, but for trend trading and catching a breakout, there are only a few that you need to understand.

Stock Volume Interpretation

These are some aspects of stock volume that should be understood. In this example we will use the Silver ETF Chart to analyze volume in some of the scenarios listed above.

Buying Volume

After drawing trend lines and finding patterns, we want to determine the breakout price. In this case, that would be any area above and outside the wedge, i.e. the upper black line in the chart below.
Observe two things here. 1) Price “Broke out” of the Wedge 2) Buying volume (arrow) is greater RELATIVE to past buying volume under the wedge area. Notice that a few days before the breakout volume is rising. This will help you anticipate a major move.

Note: Some might say that to the left of the “relative area” there is significantly higher volume. However, price action is still within the wedge and these volume spikes are considered TURNING POINTS which we will discuss later.

Important: Volume by itself cannot be used to make decisions. Price Action & Volume must be used together to make an interpretation. It is also a good idea to consider past volume, do determine what is considered high or low volume. the definition of high or low volume is relative to a period of time  such as a three month chart below.

So, we have buying volume, Moving Averages are bullish, We are in Breakout territory. All signs point up. We can now buy, or execute a trade.

Stock Volume SLV

Selling Volume

Looking at the same chart below notice volume spikes and how it aligns with the upper trend lines. The price action Bounces off the upper line and comes back down. The volume below represents selling volume. You will also notice that volume spikes correspond to points on the upper trend lines. Volume & Price help to identify important price levels, in this case resistance levels.

Stock Volume 2

Volume Spikes Defining Support / Resistance

Looking at the chart below we can see volume spikes at the support levels. This is buying volume, price correlated with higher volume. The lower trend lines are “supporting” the price levels. This is an important observation in determining price tendencies.

Stock Volume Buying

 

Reversal Volumes/Turning Points

This is perhaps the most important aspect is interpreting volume. Knowing when to sell a stock is crucial is preserving capital and walking away from the trade with large profits. Often times after a huge run in stocks or commodities, there is an episode of huge volume before a major sell off. Notice a HUGE volume spike relative to past volume.

Stock Volume Reversal

 

Stock Volume Predicts Sell-off of SLV

In the following days, even larger volume was displayed and silver came crashing down. Volume is very important.  It can identify when the end of a trend is in sight. Traders who noticed this volume spike knew a turning point in the trend was coming. Experienced technical traders were able to sell their shares and  lock in a big profits profits.

Stock Volume Bottom

 

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