What Volume Tells You
Volume is the number of shares traded during a period. It is the most overlooked indicator on the chart because it is not derived from price — it is independent confirmation of conviction. A 2% rally on average volume is routine. A 2% rally on 3x average volume is institutional buying. Same price, very different meaning.
Four Volume Patterns Worth Trading
1. Breakout confirmation. Price clears resistance on volume 1.5x to 3x average — buying conviction. Clears on light volume — suspect a fakeout. This single rule prevents most failed-breakout losses.
2. Volume climax. A massive volume bar at the end of a strong move often marks exhaustion. The extreme reached on that bar tends to hold as support (sell-offs) or resistance (rallies).
3. Volume divergence. Price makes a higher high but volume on that high is lower than the previous high. Fewer traders chasing. Often precedes a reversal. Same logic inverted for lower lows.
4. Volume dry-up in consolidation. Volume should decline during tight ranges or pullbacks within a trend. Disinterested holders waiting. Breakout from the consolidation on a volume surge is a high-quality continuation signal.
Volume Indicators
Simplest is the volume bar chart with a 20- or 50-period MA overlay. On-Balance Volume (OBV) accumulates signed volume, giving a cumulative line that should track or lead price in healthy trends. OBV/price divergence is a useful warning.
What Volume Cannot Tell You
Volume reflects activity, not direction of conviction. Large green-candle volume usually means buyers were aggressive, but could be forced sellers dumping into willing buyers. Use as a sanity check, not the whole story.
Rules
- Never trust a breakout on below-average volume.
- Volume climax at the end of a sharp move often marks a turning point.
- Healthy uptrends show rising volume on advances, falling on pullbacks.
- Compare against a 20- or 50-bar moving average, not against last week.