What is a volume indicator?
Volume is the examination of the number of shares of a security that have been traded in a given period. It can be analyzed to infer many trends in financial markets, such as liquidity, price reversal, trend confirmation, bullish signs, etc. For instance, the higher the volume, the more active the security.
How does the volume indicator work?
To determine the movement of the volume (up or down), traders look at the volume bars that usually appear at the bottom of the price chart, which illustrate how many shares have traded per period and show trends in the same way that prices do.
Volume bars on a stock chart can be configured to be either red or green. A red volume bar means the price declined during that period and the market considers the volume during that period as selling volume. If the volume has a green bar, then the price rose during that period and it is considered by the market as buying volume.
How to use VOL to trade?
- When a stock's price breaks above resistance level, the breakout is generally believed to be more significant if volume is high or above average. A breakout accompanied by low volume suggests enthusiasm for the move may be lacking.
- An uptrend allied with increasing and/or above average volume implies investor enthusiasm for that stock is strong, which could lead to more buying and even higher prices.
- An uptrend without increasing and/or above average volume suggests investor enthusiasm is limited. Although the price could continue to rise, many traders may start to consider exiting the position.
- When the price breaks below a support level, the breakdown is generally believed to be more significant if volume is high or above average. A breakout accompanied by low volume suggests enthusiasm is lacking.
- A downtrend accompanied by increasing and/or above average volume implies investors have doubts about the stock, which could lead to more selling and even lower prices.
- A downtrend without increasing and/or above average volume implies investor concern is limited. While the stock's price may continue to fall, traders who use volume analysis may start to follow the stock and watch for signs of a pickup supported by increasing volume.
