Warrior Trading Blog

Incorporating Volume Analysis To Make Better Trades

volume analysis

In stock markets, volume analysis is a crucial skill. Each trading platform regularly includes volume. This is due to the fact that the volume indicator is one of the simplest and surest channels of observing a stock’s selling and buying activity at key levels.

Every time a volume analysis is integrated with price action, it heightens the chances of selecting a high probability trade.

Volume Analysis

Volume is generally the number of shares of a given stock that trade over a specific time. This period can be a minute or a day. The color of the volume bar is either red or green on a stock chart.

Red bars depict lower closure of stock for the given period while green bars are shown in instances of higher closure of stock prices. Understanding the rule of thumb is of great significance. It highlights that stock is more active when the volume is high.

This explains why day traders engage stocks with high volume. It is essential for these investors to get out or in a trade easily swiftly.

Breakouts – An overview

When the price of a stock is shifting in scope or a sideways bearing, the volume will probably point toward how the breakout is highly likely to occur:

  1. When prices are rising with increased volume close to the peaks of the formation of price charts, it implies that an upward breakout could happen.
  2. In the event that prices are reducing with higher volume adjacent to the troughs of price chart formation, a downward breakout can take place.

Volume Analysis – The Three Uses

Volume analysis can be used for the following:

  1. To ratify trends

Volume increases during moves in an actual trend’s direction. When a decrease in the volume occurs, it is an indication that the trend is strong, thus, it could progress into the future.

  1. To confirm price breakouts

Volume can be incorporated to verify price breaks, particularly near the resistance and support levels of the stock. A breakdown below support level or above resistance level, with a higher than average volume, generally indicates that the breakdown is potentially appropriate. On the contrary, the breakdown is likely to fail in instances of low volume.

  1. To identify potential reversals of prices

Decreasing volume in the course of a stalling trend may depict a potential reversal of price. This means that a decrease in volume in the course of a downward or upward trend suggests that a possible reversal may occur.

When the volume goes rises as a result of an up move, then a sudden drop in prices takes place. For that reason, traders should look out for the volume on the next price rally. Instances of lower volume in the rally, as compared to the volume spike, are good indications that the price will continue to lower.

Helpful guidelines

When examining volume, the following tips can be quite beneficial:

    • A trend can continue in relation to decreasing size for a prolonged duration. Nonetheless, diminishing volume can typically denote that the trend is deteriorating.
    • Increasing volume illustrates the conviction of the sellers and buyers in either steering the price down or up, respectively.
    • Volume should preferably be lower when the price changes in the trending direction and larger when shifting against the patterns.
    • High volume, along with pointed cost movements against the drift, reveals the trend is dwindling.
    • An extreme volume spike, for instance, when it trends up, over and above typical situations, like ten times or beyond average volume, could highlight the conclusion of a trend.

Sum and Substance

Volume is a valuable tool, and there are diverse ways to exploit it. When engaging in day trading, it can provide fundamental insight. If not for anything else, you can use volume to isolate stocks. In an ideal situation, investors’ day-trading stocks should entail significant average volume so that they can effortlessly enter and exit.

Besides, the volume aspect can be used to assess a stock’s trend. By doing so, you can evaluate the propensity that the trend will keep on reversing. Notably, volume analysis is far from perfect, and it provides only complementary details; therefore, you should not feel pressurized to embark on dissecting volume and day trade fruitfully.

Bottom Line: The use of volume to evaluate stocks can boost profits and minimize risks.


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