Reading VolumeTechnical Analysis
Volume bars show the amount of the security traded for the length of the bar. The security can be equities, futures contracts or any other volume tracked security, but volume always shows the total amount traded. The chart displays vertical bars at the bottom of your chart, possibly isolated in a separate section. A higher volume bar indicates high trading volume, while small volume bars indicates light amounts of the security were traded. The volume also essentially measures emotions. Greater trading volume equates to more intensity within the marketplace, and a higher need to acquire or liquidate holdings by market participants. Volume has its own peaks and valleys and moves up and down. Changes in the amount of volume is normal, but increasing volume may have a news or event oriented significance that should be investigated.
Viewing price without considering volume can result in errors and mistakes. Volume is an important confirming indicator of price trends, and abnormal volume movement in trends can also be indicative of problems. The volume should rise as the trend moves in its continued direction, and fall when the trend is moving away.
In an uptrend, the weight of volume should be on upward movements, not pullbacks or declines. Volume should rise as prices increase and fall as prices decrease. In an uptrend, volume sometimes rises before price. If volume is falling while price is rising in an uptrend, a divergence appears, and price is likely to decline in the future. Buyers are less interested in transactions for more shares, and they will eventually cease to drive the price upwards. If price is making new highs on declining volume or lower volume peaks, you should be aware that changes are incoming that may negatively impact long positions.
In a downtrend, the weight of volume should be on downward movements, not bounces or inclines. Volume increases as price falls, and decreases as price rises. If volume is rising while price is rising in a downtrend, a divergence exists. The price is likely to rise in the future. Sellers are less interested in transactions for more shares, and the price will eventually pull upwards. If price is making new lows on declining volume or lower volume peaks, you should be aware that changes are incoming that may negatively impact short sales.
Sometimes interactions between price and downtrends occur dramatically, volume skyrockets while price plummets. This spike in sales is known as a selling climax, and sellers often clear themselves out of the market. After a selling climax, only buyers of a security are typically left in its marketplace, which makes this climax the final bottom. The price afterwards is pushed upwards. Selling climaxes have a low chance of being undercut in the future.
As shown, volume can spike upwards or downward. A spike is a sizable increase, usually double, the amount of previous volume measurements. Volume spikes in a price trend can clear one side of out of the market, either on the buy side or the sell side, but it is not guaranteed.
Volume is updated at varying rates depending on the marketplace. In the futures market, volume is updated with a one-day delay. A live estimation of volume updates constantly, but this is not reliable each second that you are trading. In the equity markets, the correct amount of volume is consistently updated.
When reading volume there is one considerable issue which must be investigated, called “limit days”. Limit days occur in certain markets when prices move too far in a single session, or series of sessions, to limit volatility. On these days, volume can be low even though price movement is high, implying that there is a divergence when one doesn’t exist. In actuality, price movement was simply cut off before volume could actually build.
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