Volume Analysis Definition

Volume analysis is the technical analysis technique of assessing the health of a trend, based on volume activity. Volume analysis is one of the oldest trading indicators in the market. Many traders have long abandoned volume for seemingly more accurate indicators such as RSI, MACD, etc.; however, if you are a seasoned trader, you know that volume is the only indicator you need on your chart.
 

Breakouts and Volume

Traders will often look for breaks of support and resistance to enter positions. There are two key components to confirm a breakout: (1) price and (2) volume. When stocks break critical levels without volume, you should consider the breakout to be suspect.

Volume Breakout

Price Trends and Volume

When a stock is moving higher in a stair-step approach, you will want to see volume increase on each successive high and decrease on each pullback. The underlying message is that there is more positive volume as the stock is moving higher, thus confirming the health of the trend.

Volume Analysis

Volume Spikes

Volume spikes are often the result of news driven events. It occurs when there is an increase of 500% or more in volume over the recent volume average. This volume spike will often lead to sharp reversals, since the moves are unsustainable due to the imbalance of supply and demand. Trading counter to volume spikes can be very profitable, but it requires enormous skill and mastery of volume analysis.

Volume Spike