How Trading Volume Is Used In Technical Analysis To Confirm Trends And Reversals
The quantity of securities and shares that were traded overall within a specific time frame is known as the trading volume. Since it captures the whole activity of a securities or market, trading volume serves as a technical analysis indicator.
Investors often use trade volume to verify a trend’s existence, continuation, or reversal. In essence, trading volume can validate a security’s price movement, which helps investors decide whether to purchase or sell a security.
Ways To Use Trading Volume In Technical Analysis
Typically, rules assess a move’s strength or weakness when examining volume. As traders, we tend to follow strong moves and avoid weak moves, or we may even look for an entrance in the direction of the weak move’s opposite direction. These principles offer basic direction for stock market technical analysis.
Trading Volume For Trend Confirmation
Traders shouldn’t be surprised when they see increased volume in a growing market. To keep driving prices higher, buyers must continue to buy in greater quantities and with greater zeal. A potential reversal may be signalled by rising prices and falling volume, indicating a lack of interest.
It may be difficult to comprehend, but a low-volume price decline (or increase) is not a reliable warning. When you find a big-volume price move during your technical stock analysis, the stock changes fundamentally.
Exhaustion (Depletion) Moves & Trading Volume
Depletion moves are present in both rising and falling markets. These tend to be abrupt price changes accompanied by an abrupt volume rise, which denotes the end of a trend. The move was exhausted by those who delayed and were concerned about missing more of it at market tops.
When a market is at its lowest point, declining prices eventually drive a lot of traders out, increasing volatility and volume. The volume will drop following the spike in these circumstances, but the other volume rules can be used to examine how volume behaves over the ensuing days, weeks, and months.
Trade Volume To Confirm Price Reversals
After a significant price increase or decrease, if the price starts to range with substantial volume but very little price movement, this may indicate that a reversal is about to occur, and prices will reverse course.
Tips To Use Trading Volume For Value Investment
- High or rising volume may indicate a purchasing opportunity during an uptrend.
- It may be time to sell and take profits if volume declines during an increase.
- Traders prefer to avoid trading during a downtrend if there is a high or rising volume.
- A declining volume in decline indicates an impending reversal & a good buy move.
Note: Trade volume is used to verify trends, reversals, and breakouts in more complex chart patterns like the pennant, head, shoulders, and flag patterns.
Ending Note
So, there are plenty of technical analysis apps that help you leverage trade volume for trend analysis. Follow the guidelines here while using such apps to determine whether the market is strong or weak.
Also, use these approaches above to determine whether volume confirms a price move or indicates that a reversal may be imminent. Make the most of the volume-based indicators to make value investments every time you perform technical analysis.
FAQs
How can I use trade volume in technical analysis?
Analysing the overall securities transacted within a specific period is known as volume analysis. They could be securities such as shares or contracts. According to technical analysts, trade volume is one of the key indicators of the likelihood that a certain trading decision will be successful.
What is the connection between trend and trade volume?
High or rising volume may indicate a good time to buy in an upswing. In an upswing, declining volume can signify that it’s time to sell and take profits. In a decline, high or rising volume may indicate it is preferable to avoid trading.
