Volume: the other half of the chart
A price says where trades took place. Volume says how much trading took place. A 2% rise does not mean the same thing with 20,000 shares traded or with 2 million (fictitious example). Volume is one of the few technical analysis tools not derived from the price itself, which explains its role as "confirmation". This article explains what it measures, how it is read with the price, and what it should not be made to say.
What volume measures
Volume is the number of shares traded over a period (a session, an hour). It is read relative to its usual values: a volume of 1 million shares is high for a stock that usually trades 100,000, low for one that trades 10 million. It is therefore compared with a recent average (for example that of the last 20 sessions).
The classic reading: price and volume together
| Situation | Usual reading |
|---|---|
| Price rises, high volume | Move backed by broad participation |
| Price rises, low volume | Less convincing move, to be confirmed |
| Price falls, high volume | Bearish move accompanied by heavy trading |
| Price falls, low volume | Less pronounced pullback, sometimes a mere pause |
These readings are reference points, not rules: low volume can also accompany a lasting rise, for example in the middle of summer.
Volume and breakouts
A breakout through a level (see support and resistance) is judged more credible when the day's volume is clearly above the average. Conversely, a crossing on low volume is judged less reliable by analysts, with no guarantee either way.
Fictitious example. A stock whose average volume is 200,000 shares per session breaks through a resistance on a day when 700,000 shares are traded, that is 3.5 times the average. The crossing is judged more significant than the same move with 150,000 shares. This does not say it will hold: it only indicates that more participants took part.
Abnormal volumes
A volume clearly above normal generally marks an event: earnings release, announcement, index change, entry or exit of a large shareholder. It can also appear at the end of a prolonged move ("capitulation" or euphoria volume), but this interpretation can only be identified after the fact.
OBV and volume indicators
The OBV (on-balance volume) accumulates volumes: it is added on days when the price closes higher, and subtracted on days when it closes lower. An OBV that rises while the price stagnates is sometimes interpreted as a sign of growing participation, without that prejudging what follows. Other indicators (accumulation/distribution, volume-weighted price) rest on similar ideas.
Divergences
A divergence occurs when the price and the volume (or a volume indicator) do not move in the same direction: for example, a price reaching a new high with ever-lower volume. Sometimes a sign of exhaustion is seen in it. It is a clue, not a signal: a divergence can last a long time without consequence.
The limits of reading volume
- The figures depend on the platforms taken into account. Securities trade on several platforms: depending on the data used, the volume shown is not the same.
- ETFs and illiquid stocks have volumes that poorly represent real interest.
- Volume varies during the day and by season. Opening, closing and pre-holiday sessions have particular volumes.
- It does not say who is buying. A high volume reflects as many buyers as sellers.
Key takeaways
- Volume measures the number of shares traded, to be compared with a recent average.
- A price move with high volume is judged more significant than with low volume.
- A breakout is more credible with volume, with no guarantee it will hold.
- OBV and divergences are clues, not signals, and volume depends on the source of the data.
This article is for information and education only and does not constitute personalised investment advice. The figures in the examples are fictitious and illustrative. Investing involves a risk of capital loss. Past performance is not a reliable indicator of future performance.