The definition of volume:
Volume is the number of shares or contracts that trade over a given period of time, a day usually. Higher volume means more active security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares traded per period and show trends as same as prices do.
It is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is a stronger and more relevant move than a similar move with weak volume. So, if you are looking at a large price movement, you should also examine the volume to see whether it tells the same story.
The volume is important factor of technical analysis because:
Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. So, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose and may end.
When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume.
The relation between Volume and Chart Patterns:
Volume confirms chart patterns. Price patterns can be confirmed with volume. In most chart patterns, there are many pivotal points which are decisive to what the chart is able to tell chartists. If the volume is not there to confirm the pivotal moments of a chart pattern, then quality of the signal of a pattern is weakened.
The relevancy between volume and price:
In technical analysis, volume comes first. As volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end.
You can also check our technical analysis for more advanced articles, or head to the trader guide for tutorials and guides.