Dolomite Learning Series: Volume Analysis
The Importance of Volume Analysis
The number of people trading at a specific period of time is represented by a volume chart (see figure 1). Traders can use the volume chart in conjunction with price movement and other indicators to make informed decisions. Volume is an important indicator that shows the strength of a trend based on buying and selling pressure. When used in conjunction with price, volume is a good indicator of momentum. Volume can give traders an idea of the strength/validity of a movement in price/trend.
Figure 1 — Price and Volume Chart — Source: Stockopedia.com
Volume as a Confirmation
High trading volumes can tell us a lot about investor outlook as well as the strength of a change in price/trend. For example, a significant price increase along with a significant volume increase can signal a strong bullish continuation or reversal in trend (see Figure 3). A price decrease with high volume results from a large number of people selling, and indicates a bearish market. Volume generally precedes price.
Volume is also used to confirm chart patterns. If sufficient volume is not present, chart patterns are less reliable.
Figure 2 — Volume as Confirmation — Source: Commodity.com
Figure 3 — General Rules in Volume Analysis — Source: reddit.com (r/cryptocurrency)
Thank you for reading this installment of the Dolomite Learning Series. Happy Trading!
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Disclaimer: The information here is intended to be used for educational purposes only and is not financial advice. I am not a financial adviser.
