I didn’t always use volume as a criterion for finding my perfect trade.

Like many new traders, in the beginning, I only used price and some other indicators as criteria for my trade setup.

And there is nothing wrong with that approach!

But it felt like there was always a gap in my analysis…like there was something important I was missing.

However, I later on discovered that some of the most famous discretionary traders in the industry were implementing volume analysis in their trading and making big bucks!

Now I use this analysis to rake in some great wins and using this simple trading strategy you can get an edge in the markets too!

Today we’re going to a deep dive into volume analysis.

I’ll teach you how to utilize it on a bearish and bullish chart…

Explain why so many traders mess it up, and how you can avoid being like them.

 

Trading Volume Analysis

Trading volume is a measure of the number of shares traded during a specified time period.

Traders often use trading volume as a way to assess the significance of changes in a securities price.

For example, trading volume can help confirm price trends or serve as a warning for a potential trend reversal.

Even though not every increase or decrease in trading volume is significant – it can potentially give you a sense of the true strength behind a price move.

Generally, above average and/or increasing volume can signal that traders are enthusiastic in the trade.  While below average and/or decreasing volume can signal that traders lack enthusiasm in the trade.

In other words…

Trading volume can give you clues about greed and fear in a stock.

  • If the trading volume is high on up days, it shows greed.  Traders are heavily buying the stock and absorbing any selling volume.
  • If the trading volume is high on down days, it shows fear.  Traders are heavily selling the stock and overwhelm any buying volume.

This allows a trader to determine who is in control of the stock by looking at the volume action and confirming that it is in sync with the price action.

In this article, we will take a closer look at how to use trading volume as a confirmation or warning signals for changes in a stock price.

 

Trend Confirmation Signals

When using volume analysis, a trader would be looking for possible clues to assist with determining the strength or weakness of a trend.  

Two outcomes: 

  • Trend Confirmation: Volume increases as the stock trends long or short
  • Trend Rejection: Volume does not increase (or decreases) as the stock trends long or short

Trend Confirmation:

 

 

Trend Rejection:

 

 

These examples show how important volume analysis is for trading trends.

With a quick glance, you are able to determine exactly what the market thinks of the trend and if you are going to trade your favorite trend continuation or reversal pattern.

Let’s take a look at the next pattern…

 

Bullish trading signals

By combining volume analysis with popular trading strategies, you are able to significantly improve your chance of a successful trade.

Two examples we are going to cover:

  • Upside breakout on large volume
  • Uptrend with increasing volume

 

Upside breakout on large volume

During a sideways market, a stock price will run into a resistance level.  If the stock is bullish, traders will begin to buy the stock causing it to consolidate near the resistance level forming a breakout pattern (Bull Flag, triangle, etc.)

Once the price breaks above resistance, the breakout is believed to be “significant” if the volume is high or above average.

This is an example of a breakout pattern higher:

 

 

In the image above a bullish triangle pattern was formed at the bottom of a downtrend.

This pattern is showing buying pressure against the upper resistance and combined with higher lows and above-average trading volume.

Once you combine volume with the price action you are able to get a “bigger picture view” and this signifies there is enthusiasm for the stock from other traders.

 

Uptrend with increasing volume

Once a trader spots an uptrend the quick reaction is to run a buy the dip strategy.

But you don’t want to do that… that’s just setting you up for a failed trade.

Instead… wait for volume confirmation!

Here’s what I mean…

 

 

In the example above, notice the decreasing volume going into the trend for a buy the dip strategy. This signals that the trend is weak and may not sustain its momentum higher.

Alternatively, when a stock is trending higher, it’s best to wait for volume confirmation before going long.

Here is what I mean…

 

 

In the example above, notice the increasing volume supporting the uptrend of the stock.

This volume confirmation signals to the trader it is safe to buy the dip as the market is indicating higher prices in the future.

 

Bearish trading signals

By combining volume analysis with popular trading strategies, you are able to significantly improve your chance of a successful trade.  

Two examples we are going to cover:

  • Downside breakout on large volume
  • Downtrend with increasing volume 

Downside breakout on large volume

During downtrends and in sideways markets, a stock’s price will run into a support level.  When this price pushes downward below a previous support level, the breakdown is said to be “more significant” if it is supported with higher or above-average volume.

If there is a breakout with low volume, it could actually turn out to be a bear trap to lure traders in.

This is an example of a breakout pattern lower:

 

 

In the image above a bearish triangle pattern was formed at the top of an uptrend.

This pattern is showing selling pressure against the lower support and combined with lower highs and above-average trading volume.

Once you combine volume with the price action you are able to get a “bigger picture view” and this signifies there is enthusiasm for the stock from other traders.

 

Downtrend with increasing volume

Once a trader spots a downtrend the quick reaction is to run a sell the rally strategy.

But you don’t want to do that… that’s just setting you up for a failed trade.

Instead… wait for volume confirmation!

Here’s what I mean…

 

 

In the example above, notice the decreasing volume going into the trend for a sell the rally strategy. This signals that the trend is weak and may not sustain its momentum higher.

Alternatively, when a stock is trending lower, it’s best to wait for volume confirmation before going short.

Here is what I mean…

 

 

In the example above, notice the increasing volume supporting the downtrend of the stock.

This volume confirmation signals to the trader it is safe to sell the rally as the market is indicating lower prices in the future.

 

Wrapping up

Volume reflects market sentiment and therefore can be one of the best indicators to use to support a technical analysis of a stock.

As a rule of thumb, any price breakout or trend that is accompanied by above-average volume is considered to be of greater significance than price movements with below-average volume.

Want to get day trading alerts to rake in some huge profits using this simple volume strategy like these every day?

 

 

Want to see how I apply this all in real-time to profit in the market every day?

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Author: Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

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