What is volume and how can we use it in price charts?

In technical analysis, volume measures the number of shares traded in a stock in a period of time. Note that it is not the buy or sell quantities you see on a trading platform, but the actual number of shares bought and sold.

For example, if A wants to sell 100 shares at a particular price and B wants to buy 100 shares at that price, given that no other transactions occur in our hypothetical scenario, the trading volume of the said stock would be 100.

Simply put, the buy/sell quantity tells us about a stock’s liquidity, meaning how many buyers and sellers are available for that stock at a point in time. Meanwhile, volume measures how many trades actually take place.

When you look up a stock on a trading platform and see the “Traded Volume”, it tells you how many stocks have changed hands so far during the day. Hence, as the session progresses, the trading volume keeps increasing. Now, just like a stock’s price, you can also see the Traded Volume over different timeframes ― 1 minute, 5 minutes, 1 hour, and so on.

So, how does this help you in trading? Well, on its own, volume does not offer much value, but combining it with patterns and other technical indicators, (more on this later) helps traders strengthen their conviction regarding the direction of the stock’s movement.

Here’s how you can use volumes to improve trading:

Spot bullish/bearish signs

If the price of the stock is rising and the volumes are also increasing, it is considered bullish for the stock. This is because the upmove is fuelled by higher participation.

Similarly, if the price is falling on rising volumes, it is considered bearish for the stock.

Trend reversal

If the price of the stock is rising, but the volumes are declining, a reversal may be on the horizon. This is because fewer shares are being traded as the price is moving up, indicating dwindling interest in the stock. Similarly, if the price is falling, and the volumes are also falling, it could indicate that an upmove is around the corner.

False breakouts

In case the breakout is not met with a similar spike in volume, it could indicate a lack of interest and a higher probability of a false breakout.

How to track volume?

Some of you reading this chapter may wonder how do we measure the increase or decrease in volume. Is it higher/lower compared to the previous session? No. Most technical analysts consider the average of the last 10 days’ volume as the benchmark to compare the session’s volume.

If the last 10 days’ average volume is higher than today’s volume, the volume is said to be on lower side, and vice versa.

Other commonly used volume indicators are Volume RSI, On-balance Volume, Volume Price Trend (VPT) indicator, and Chaikin Money Flow (CMF) indicator.