In this case, a significant increase in volume is a strong buy signal. Trading volume typically goes up as the price breaks out to the upside of a pattern or formation.

Further, trading volume typically increases and continues higher than average in an uptrend, but is below average during a downtrend. Volume is relative in that it usually is greater approaching the top of a bull market than near the bottom of a bear market. A downtrend may nevertheless be extended whether average trading volume increases, decreases, or is static. After the trend ends the corrective leg usually has lower volume. However, if volume is decreasing, the current trend will probably not continue and a reversal may be imminent.Ī strong uptrend usually has more volume on the upward legs similarly, a strong downtrend will have more volume on the downward legs. If volume is increasing, whether prices are going up or down, it is probable that prices will continue their current trend. Volume should be evaluated in appraising market strength or weakness.

The accompanying Table provides general rules for volume analysis. For example, a good time to buy stock is when there are simultaneous price and volume increases. The significance of a change in volume is related to the associated price trend or pattern. On the other hand, a declining stock price may be coupled with higher volume when, for example, negative news comes out about the company. An increasing price is typically coupled with increased volume, but the price can decrease without an increase in volume if investors lose interest in the issue. Average trading volume typically decreases when a stock is in a downtrend, because investors view negatively a stock declining in price. In other words, volume gives an indication of the strength (momentum) of a move in price.Ĭurrent trading volume and average trading volume should be compared. Therefore, an analysis of price and volume allows the investor to better interpret the trends in price and any changes thereto. A price move, up or down, that is on higher volume is more significant. It is important to look at the relationship between volume and price. How volume and price moves reveal the market's trend

Volume is useful in ascertaining how strong a change in expectations really is. Volume typically follows a trend, expanding on rallies and decreasing on reactions.

High volume but no price movement