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Volume - From Traders Book of Volume

Volume analysis is an important part of technical analysis. When price rises or falls on increasing volume, the trend is strong, but diminishing volume signals the trend is vulnerable. The relationship between volume and price patterns shows the strength and weakness of trends. Strong volume confirms trends will likely continue, while low volume or inconsistent volume indicates trends may be losing conviction and could reverse. The six basic volume/price relationships provide clues about the strength and direction of current trends.

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280 views2 pages

Volume - From Traders Book of Volume

Volume analysis is an important part of technical analysis. When price rises or falls on increasing volume, the trend is strong, but diminishing volume signals the trend is vulnerable. The relationship between volume and price patterns shows the strength and weakness of trends. Strong volume confirms trends will likely continue, while low volume or inconsistent volume indicates trends may be losing conviction and could reverse. The six basic volume/price relationships provide clues about the strength and direction of current trends.

Uploaded by

Dynamic Sangakpham
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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INTRODUCTION

 When price rises or falls on increasing volume, there is strength and validity
of the trend.
 When price rises or falls on diminishing volume, it is a sign that the market
is tired, buyers and sellers are tired, and the trend is vulnerable to a reversal.
 It is the combination of volume and price – the relationship, the patterns, the
divergences, the strengths and weakness- that really form the basis of
volume analysis.

THE IMPORTANCE OF VOLUME IN


TECHNICAL ANALYSIS AND HOW BASIC
VOLUME ANALYSIS WORKS
 Volume is most commonly compared to the fuel of a car engine.
 If the tank is low on gas (i.e weak volume), the car engine eventually will
falter and stall. (Trend losing strength).
 Had the tank been full (i.e strong volume), the car would have just cruised
on down the road. (Trend with strength).
 Just as too much fuel can flood an engine, too much volume, in the form of
spikes and surges (indicates an emotionally charged trading environment),
can signal that the “engine” might stop heading in its current direction (i.e a
change in trend is near).
 It is the volume action, not the price action that signals the first indication of
the direction of that resolution.

SIX BASIC VOLUME/PRICE


RELATIONSHIP
1. Expanding volume with price moving higher or lower – In this type of
pattern, the market is in an uptrend or in a downtrend and there is consistent
conviction among traders which displays itself as expanding volume in the
direction of trend. This increases the odds that price movement in the
direction of the trend will continue.
2. Expanding volume with minimal or no price movement – Lack of price
movement on expanding volume shows that buyers and sellers are
struggling for control of market direction. It is an indication that
countertrend forces are building and that the movement of the trend is
becoming labored which puts the continuation of the trend in jeopardy.
Typically, price trades in arrange for a number of days in this type of
pattern.
3. Contracting volume with price moving higher or lower – when the
volume contracts as the price moves higher or lower, the volume pattern is
not confirming the price trend. This means that the conviction behind the
trend is not strong enough to attract new participants. The absence of new
participants decreases the odds that the existing trend will continue; a
reversal is possible.
4. Contracting volume with minimal or no price movement – Lack of price
movement on a pattern of contracting volume shows that buyers and sellers
lack conviction that the price trend will continue. We see this trend in
consolidation phase. New participations are required to initiate a new trend.
5. Consistent volume with price moving higher or lower – price movement
with a consistent volume pattern shows that buyers and sells are in
agreement that the trend should continue. Any transactions against the trend
(sell in an uptrend or short covering on a downtrend) are a product of profit
taking decision not necessarily changes in sentiment.
6. Consistent volume with minimal or no price movement – Buyers and
sellers are in agreement that a stock, index or commodity is fairly valued at
its current price range. This is an example of trendless market.

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