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How Technical Analysts Interpret Volume

Volume is the number of shares trading hands in a day. Technical analysts pay close attention to volume as an indication of how much conviction there is behind stock price movements. It makes sense, right?

Imagine you advertise your old golf clubs online for $200. If no one calls, you know the price was too high. Conviction for the clubs at that price is low. But when you drop the price to $100, your phone rings off the hook. Conviction is now high.

Trading volume kind of works the same way. You can see how many investors are trading a stock when it rises or falls to find out how anxious investors are to sell or buy.

To get a stock’s moving average, go to the BigCharts home page. Enter the ticker symbol for the stock you’re interested in into the search field at the top of the screen, and then click the red Interactive Chart button. A stock chart, called the Interactive Chart, appears.

Check out the second chart — the one beneath the OHLC stock chart. You’ll notice that it sports a bunch of vertical lines and is labeled Volume. Those lines show you how much trading volume occurred on each day. The taller the line, the more volume there was. Hover your mouse pointer over the volume box to activate the control. Then you can put your cursor in the box to find out exactly how many shares traded hands.

Technical analysts generally compare a stock’s volume to its average daily volume. Average daily volume is available on the main quote pages of most financial websites.

The table gives you some general rules technical analysts use to interpret a stock’s trading volume.

How Chart Readers Interpret Trading Volume
Stock Moves . . . And Volume Is Lower Than Average . . . And Volume Is Higher Than Average
Up Move can’t be trusted. There aren’t many buyers supporting the rise. The rally is for real. Indicates investors are eager to buy the stock.
Down Sell-off might be temporary. Most investors are holding on as a few investors bail out. A bad sign. Indicates investors are breaking the door down to get out of the stock.
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