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How to Use Stock Volume

to Improve Your Trading
By CORY MITCHELL Updated February 23, 2024

Reviewed by SAMANTHA SILBERSTEIN

Fact checked by VIKKI VELASQUEZ

Part of the Series

Guide to Technical Analysis

Trading volume is a measure of how much a given

financial asset has traded in a period of time. For
stocks, volume is measured in the number of
shares traded. For futures and options, volume is
based on how many contracts have changed
hands. Traders look to volume to determine
liquidity and combine changes in volume with
technical indicators to make trading decisions.

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Looking at volume patterns over time can help get

a sense of the strength of conviction behind
advances and declines in specific stocks and entire
markets. The same is true for options traders, as
trading volume is an indicator of an option’s
current interest. In fact, volume plays an
important role in technical analysis and features
prominently among some key technical indicators.

KEY TAKEAWAYS
Volume measures the number of shares
traded in a stock or contracts traded in
futures or options.
Volume can indicate market strength, as
rising markets on increasing volume are
typically viewed as strong and healthy.
When prices fall on increasing volume, the
trend is gathering strength to the
downside.
When prices reach new highs (or no lows)
on decreasing volume, watch out—a
reversal might be taking shape.
On-balance volume (OBV) and the Klinger
oscillator are examples of charting tools
that are based on volume.

Basic Guidelines for Using Volume

When analyzing volume, there are usually
guidelines used to determine the strength or
weakness of a move. As traders, we are more
inclined to join strong moves and take no part in
moves that show weakness—or we may even
watch for an entry in the opposite direction of a
weak move.

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These guidelines do not hold true in all situations,

but they offer general guidance for trading
decisions.

1. Trend Confirmation
A rising market should see rising volume. Buyers
require increasing numbers and increasing
enthusiasm to keep pushing prices higher.
Increasing price and decreasing volume might
suggest a lack of interest, and this is a warning of a
potential reversal. This can be hard to wrap your
mind around, but the simple fact is that a price
drop (or rise) on little volume is not a strong
signal. A price drop (or rise) on large volume is a
stronger signal that something in the stock has
fundamentally changed. [1]

2. Exhaustion Moves and Volume

In a rising or falling market, we can see exhaustion
moves. These are generally sharp moves in price
combined with a sharp increase in volume, which
signals the potential end of a trend. Participants
who waited and are afraid of missing more of the
move pile in at market tops, exhausting the
number of buyers. [2]

At a market bottom, falling prices eventually force

out large numbers of traders, resulting in volatility
and increased volume. We will see a decrease in
volume after the spike in these situations, but how
volume continues to play out over the next days,
weeks, and months can be analyzed by using the
other volume guidelines. [2]

3. Bullish Signs
Volume can be useful in identifying bullish signs.
For example, imagine volume increases on a price
decline and then the price moves higher, followed
by a move back lower. If, on the move back lower,
the price doesn’t fall below the previous low, and if
the volume is diminished on the second decline,
then this is usually interpreted as a bullish sign. [3]

4. Volume and Price Reversals

After a long price move higher or lower, if the price
begins to range with little price movement and
heavy volume, then this might indicate that a
reversal is underway, and prices will change
direction. [4]

5. Volume and Breakouts vs. False Breakouts

On the initial breakout from a range or other chart
pattern, a rise in volume indicates strength in the
move. Little change in volume or declining volume
on a breakout indicates a lack of interest and a
higher probability for a false breakout. [5]

6. Volume History
Volume should be looked at relative to recent
history. Comparing volume today to volume 50
years ago might provide irrelevant data. The more
recent the data sets, the more relevant they are
likely to be.

Important: Volume is often viewed as an

indicator of liquidity, as stocks or
markets with the most volume are the
most liquid and considered the best for
short-term trading; there are many
buyers and sellers ready to trade at
various prices.

Three Volume Indicators

Volume indicators are mathematical formulas that
are visually represented in the most commonly
used charting platforms. Each indicator uses a
slightly different formula, and traders should find
the indicator that works best for their particular
market approach.

Indicators are not required, but they can aid in the

trading decision process. There are many volume
indicators to choose from, and the following
provides a sampling of how several of them can be
used.

1. On-Balance Volume (OBV)

On-balance volume (OBV) is a simple but effective
indicator. Volume is added (starting with an
arbitrary number) when the market finishes higher
or subtracted when the market finishes lower. This
provides a running total and shows which stocks
are being accumulated. It can also show
divergences, such as when a price rises but volume
is increasing at a slower rate or even beginning to
fall. [6]

2. Chaikin Money Flow

Rising prices should be accompanied by rising
volume, so Chaikin Money Flow focuses on
expanding volume when prices finish in the upper
or lower portion of their daily range and then
provides a value for the corresponding strength. [7]

When closing prices are in the upper portion of the

day’s range, and volume is expanding, values will
be high. When closing prices are in the lower
portion of the range, values will be negative.
Chaikin Money Flow can be used as a short-term
indicator because it oscillates, but it is more
commonly used for seeing divergence. [7]

3. Klinger Oscillator
Fluctuation above and below the zero line can be
used to aid other trading signals. The Klinger
oscillator sums the accumulation (buying) and
distribution (selling) volumes for a given time
period. [8]

What Is the Most Common Time Frame

for Measuring Volume in Stocks?
Daily volume is the most common time frame used
when discussing stock volume. Average daily
trading volume is the daily volume of shares
traded, averaged over a number of days; this
smooths out days when trading volume is
unusually low or high.

What Are Some Popular Volume

Indicators?
Popular volume indicators include three
mentioned above—on-balance volume (OBV),
Chaikin Money Flow, and Klinger oscillator—as
well as the volume price trend indicator and
Money Flow Index.

What Trading Signals Can Be Provided

by Volume?
Volume patterns provide an indication of the
strength or conviction behind price advances or
declines for a stock or sector or even the entire
market. An advance on increasing volume is
generally viewed as a bullish signal, while a
decline on heavy volume can be interpreted as a
bearish signal. New highs or lows on decreasing
volume may signal an impending reversal in the
prevailing price trend. [3]

In the Case of a Pullback, How Can

Volume Be Interpreted?
In the case of a pullback in a stock or market, the
volume should be lower than it is when the price is
moving in the direction of the trend, typically
higher. Lower volume indicates that traders do not
have much conviction in the pullback, and it may
suggest that the market’s upward trend could
continue, making the pullback a buying
opportunity.

The Bottom Line

Volume is a handy tool to study trends, and as you
can see, there are many ways to use it. Basic
guidelines can be used to assess market strength
or weakness, as well as to check if volume is
confirming a price move or signaling that a
reversal might be at hand. Indicators based on
volume are sometimes used to help in the decision
process. In short, while volume is not a precise
tool, entry and exit signals can sometimes be
identified by looking at price action, volume, and a
volume indicator.

This article is not intended to provide investment

advice. Investing in securities entails varying
degrees of risk and can result in partial or total
loss of principal. The trading strategies discussed
in this article are complex and should not be
undertaken by novice investors. Readers seeking
to engage in such trading strategies should seek
out extensive education on the topic.

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Part of the Series

Guide to Technical Analysis

Key Technical Analysis Concepts

Getting Started with Technical Analysis

Essential Technical Analysis Strategies

1 Technical Analysis Strategies for Beginners

2 How to Use a Moving Average to Buy Stocks

3 How to Use Volume to Improve Your Trading

CURRENT ARTICLE

4 The Anatomy of Trading Breakouts

NEXT UP

5 Market Reversals and How to Spot Them

Technical Analysis Patterns

Technical Analysis Indicators

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