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What is volume?
Volume is the number of shares traded during a specific time frame
- an hour, day, week, year, for example. Shares are traded in
lots of 100 and volume is reported to reflect that fact.
Why is volume important?
On its own, volume cannot be used as a technical guide. Volume,
however, is very important because of the clues it provides about
price movements.
Patterns should never be relied upon exclusively as indicators
of the market. Combine a pattern with information about volume,
however, and a technical analyst can gain insight into both the
pattern and happenings in the market. Volume is an important element
in assessing the intensity of price movements.
According to the trader's adage, "price follows volume."
This is not quite complete. In fact, the measurements of price and
volume are coupled in the technical analyst's tool kit. The adage
should be amended: "price follows volume and volume follows
price."
Watching volume is useful in gauging the level of commitment of
buyers and sellers. Volume is an indicator of the health of a trend.
According to Achelis, a healthy
uptrend should have higher volume on its upward legs; lower volume
on its downward (corrective) legs. Similarly, a healthy downtrend
usually has higher volume on its downward legs and lower volume
on its upward (corrective) legs.13 This
information, in turn, can be used by an investors to position themselves
for a possible trend reversal.
What does low volume mean?
Low volume is often an indicator of indecisive expectations about
the price of a stock. These indecisive times are characteristic
of a consolidation period in which prices are moving sideways. If
a primary trend is moving down, volume should decrease if prices
begin to rise. If the trend is moving up, volume should decrease
if prices start to decrease.
What does high volume mean?
High volume often occurs when the market has topped and there is
strong agreement that prices will continue moving upwards. According
to Achelis, "high volume
levels are also very common at the beginning of new trends."14
This would occur when prices break out of a trading range. In addition,
when the market hits bottom, volume tends to increase fuelled by
panic selling.
13Achelis,
p. 306
14Achelis, p. 306
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