What is volume? Volume is the number of shares or contracts that exchange hand in a given period. The data is most often presented in the form of vertical lines at the bottom of the chart.
Volume – 10 reasons why you should follow it:
The volume confirms or denies the current direction of movement. In a normal uptrend volume should move in the direction of price movement. In other words bullish candles should be followed by increasing volume and corrective candles should be accompanied by decreasing volume. In bearish trend we will have opposite situation meaning that bearish candles will show growing volume while in case of bullish (corrective) candles volume will decrease.
Divergence between the direction of price movement and volume indicates a possible reversal of trend. It is not a signal for immediate decisions but it is an important warning.
Formations of technical analysis appearing on the chart (especially breaking upward, for example breaking up through a triangle or Head & Shoulders formation) should be confirmed by volume.
Disposable violent movement against the main trend should be confirmed by behaviour of volume. If in a trend, a violent movement a opposite to the main trend appears (eg. in a downtrend a single session ends with growth of +3%), it is through volume we get an answer whether this move is permanent trend reversal. If such a move is supported with significantly larger volume than many of the previous candles, it can be a signal of a trend change. However, if the volume is average for this moment there will soon be a new impulse downward.
The volume is followed by professional traders, and in contrast to the indicators that track the price this indicator provides real additional information that is obtained by trader.
Customize size of open positions to the daily volume of the instrument. For less liquid values too large position opened or closed can radically change the price of shares, contract or any other stock. This mostly applies to equity and commodity trades.
The volume is one of the additional pieces of information that should not be ignored in the decision-making process in the course of trading. Successful traders understand and make use of all the information to hand.
The volume indicates the entrance of Smart Money to the market. Indicators measuring the behaviour of the crowd do not work when a single investor, also known as Smart Money, having significant financial resources changes the course of the trend.
Volume allows you to specify moments of accumulation and distribution. It is a moment of flat market movement before the start of a longer trend. Then the price for many sessions is maintained at a similar level and the volume still remains relatively high in relation to previous time period.
Watch breaking important levels during periods of limited volatility. Breaking important levels can happen during periods of low volatility. For example, during a long weekend or between Christmas and New Year. The volume in that period indicates that at this time no Smart Money participated in the indicated movement which will ultimately be negated after the return of normal liquidity to the market.