Technical Analysis Tracks Trading Volume - dummies

Technical Analysis Tracks Trading Volume

Volume, the number of shares or contracts of a security traded in a period, is the most powerful confirming indicator of a price move, and confirmation is a key concept in technical analysis.

You can feel more confident that a price move has staying power if you know that many traders are involved in a price move and not just one or two. In technical trading, therefore, you use volume to measure the extent of trader participation.

When a price rise is accompanied by rising volume, you have confirmation that the direction is associated with participation. Similarly, if you see a price fall by a large amount, but the change isn’t accompanied by a change in volume, you can deduce that the price change was an aberration. Some trader made a mistake.

Volume sometimes leads price. The most obvious situations are when volume spikes. A spike is a volume number that is double or more the size of volume on the preceding days. Say volume has been running at 100,000 shares per day for several days or weeks and suddenly it explodes to 500,000 shares. If the price had been in a downtrend, this wild increase in volume means that the crowd is throwing in the towel and exiting en masse.