You’ve found the perfect setup: a classic breakout from a consolidation pattern, a bullish moving average crossover, or an explosive candlestick reversal. You put your finger over the “buy” button. But before you bring out the big bucks, there’s one essential question to ask: “Is volume confirming this move?”
The price tells you what’s going down. Volume gives you a sense of how much conviction there is behind the move. It is the market’s engine fuel. A strong price signal coupled with weak volume is a rocket without the propellant, it just may sputter not take flight. To ignore volume is to trade on a wish and a prayer, to rely purely on price action that often appears as nothing more than a deceptive mirage.
In this article, we are going to decostify volume analysis and it’s got nothing to do with price patterns – rather pattern validation is what you will be using volume for. We will discuss the basic volume principles and clarify haw to use it for confirming breakout s, indicating reversals and determining the power of a trend.
The Fundamental Principle: Volume is the Gasoline
At its core, volume is the amount of shares or contracts that change hands in a security. Because all trades require a buyer and seller, volume measures the extent of their agreement. Volume tells us the amount of consensus on current price (high volume), versus indifference or uncertainty.
Think of it this way:
High Volume + Price Move = Conviction. Institutional money (the “smart money”) is involved, providing the move with credibility.
Low Volume + Price Move = Suspicious. The shift is probably due to thin liquidity or retail traders and vulnerable and could be easily reversed.
Three Golden Rules Of Volume Analysis
Before we get into some of the signals be sure you embed these three core principles.
Volume Precedes Price: Many times a surge in volume will come before price makes it’s big move. This is the “smart money” loading or unloading positions before the herd figures it out themselves. Keeping an eye on unusual volume is also a helpful way to identify a potential breakout or breakdown.
Confirming Volume: When a stock is healthy and beginning to uptrend, volume should expand as the stock price increases (on the up days) and contract when the stock moves down (makes a pullback). This is an indication that buyers are aggressive in the rallies and sellers have no interest in selling on dips. This is in reverse for a downtrend, volume should increase on down-days and decrease on up-days (relief rallies).
Volume Must Confirm The Breakout: A breakout of important support/resistance level should only be regarded as valid if it is accompanied by massive sustained volume. If this breakout happens on the low volume, it is a big warning sign for a false or so-called ‘bull trap’ and that you should stay away from longing the market at least.
How to Apply It: Volume Helps You Confirm Your Trades
How do we apply these concepts to trading?
Testing Bulls and Bears: Validating the Breakout
This is the most fundamental everyday use of volume. A chart pattern — such as a triangle, rectangle, or head and shoulders — depicts a battle between buyers and sellers. The breakout is the resolution. Volume is how you know who won the war.
A good Bullish Breakout: There is a heavy price volume surge as the price moves through an important resistance level. This surge suggests that buyers have overmatched the sellers who stood in their way at those levels. The breakout is most likely to continue.
Confirmed Bearish Breakdown: Price passes through a key support level with a substantial surge in volume. This shows that sellers have overwhelmed the buyers and a new downtrend is probably starting.
False Breakout (The Trap): A price breaks above resistance (or below support) with weak, decreasing volume. This is a major warning sign. It often looks weak and draws in late comers only to snap back into the prior range taking out all breakout traders, it implies a lack of conviction.
Actionable Tip: Make sure to always look at the volume bar of the breakout candle before entering a Trade. It must be larger—either 1.5 or two times the rolling average of the last 20 phases.
Identifying Exhaustion and Reversals: The Climax Volume
Trends don’t last forever. They culminate in a final sushtarsh of euphoria (in an uptrend) or panic (in a downtrend). Volume is going to be your best friend for spotting these exhaustion points.
Climax Top (Blow-Off Top): Once a long uptrend has been evident, price moves sharply and basically straight up on very heavy volume. It’s a classic sign of a buying frenzy, as the last buyers rush in. After everyone who wants to buy has bought, the only place left to go is down. Any shares not yet sold become harder and harder to unload without slashing prices further still. A reversal candle (such as a shooting star or bearish engulfing) on such strong volume makes for quite the sell signal.
Climax Bottom (Selling Capitulation): Following a long, persistent decline, heavy volume drives the price sharply lower one final time. This is pure scramble selling — finally the last holdouts have no choice but to liquidate. When the selling is done, the market frequently reverses smartly. A reversal candle (hammer or bullish engulfing for example) on this high of a volume can mean possible bottom.
Measuring Trend Strength: The On-Balance Volume (OBV) Indicator
Although raw volume is important, the indicators that monitor the flow of volume can tell us still more. The best known is On-Balance Volume (OBV) by Joe Granville.
How it works: OBV is a running total of volume. On a day in which the price closes up, that day’s volume is added to the OBV. On a down day, the volume is taken away.
What it Tells You: OBV is a way to measure the volume of a security, which then assists in price movements. The idea is volume sales price.
How to Use It for Confirmation:
Bullish Confirmation: In an uptrend, the OBV line should confirm the trend by rising (higher highs and higher lows). This is an confirmation that volume is confirming the price rise.
Bearish Confirmation: In a down trend, the OBV line should be in a downtrend by reaching lower lows and lower highs.
Bearish Divergence (Warning): A situation in which the price creates a new high, while the OBV line fails to form new highs. This is a sign that the trend up is losing steam and perhaps a reversal soon, price going higher but no volume interest.
Bullish Divergence: A Hopeful SignThe price reaches a new low, but the OBV doesn’t reach a new low. This indicates that the selling pressure is decreasing and accumulation might be occurring, indicator that a reversal could occur to the upside.
Your Last Minute Checklist: Before You Hit That Button
Add volume to your pre-trade checklist. For every potential trade, ask:
What does the volume tell me about the direction right now? Is it validating the trend (higher volume in direction of the trend) or is there weakness (divergence)?
If it does break out, is there a huge volume surge? Low-volume breakout is not a “trade.”
Is there a volume climax indicating seller or buyer exhaustion? Am I purchasing near a possible blow-off top, or selling near a capitulation bottom?
What is the OV (or other volume measure) doing? Is it making price action or a divergence?
Conclusion: Do Not Trade in the Dark
Speculating without knowledge doesn’t work, regardless of price. ”Trying to trade on Price alone is like trying to drive with a fogged windshield. A Volume analysis is the defroster, giving you a clean and clear view of what market tran on your mind. The difference is being a reactive trader who just chases the price vs a proactive trader that knows the force behind the move.
Screenshots: Volume Confirmation There’ll be an instant filter that helps you quickly identify and trade the most explosive breakouts, and it’s called demanding volume confirmation for your signals. You will learn the skill to enter powerful trends early and manage your trades – before they turn against you. A place for volume analysis Seriously, don’t just assume until you go broke. Follow the fuel gauge and you will see your trading travels become much easier and profitable.