Trading With Volume

Volume is the fuel behind the price movements on the chart. It shows how many buyers and sellers participated in each candle - and provides priceless information about current trend and its strength. In this article you will learn to implement Volume in your Chart Patterns Trading.

Volume before Price
Volume is the reason for price to move, trend and range. It represents the amount of money exchanged hands in any particular trading moment - and therefore it changes before price. The amount of participants in each market movement affects the price and can predict the continuation of trends. Volume is not an indicator, as it does not resolve from calculation on price. Instead, it provides leading signals on price and its future tendencies.

Volume and Trend
Volume shows the strength of the trend:
An uptrend with Rising Volume confirms the uptrend.
An downtrend with Rising Volume confirms the downtrend. Nevertheless, an uptrend must have a rising volume to keep its strength, while downtrend can prevail even with light volume. In Stocks, light volume implies lack of interest in the stock, which is also a Bearish signal. Volume should evolve similar to the trend. If it is not the case - the trend may be problematic.

Trading With Volume
Volume itself should not be used as a trading signal. A weakening volume in an uptrend is not a signal for short trade. It can be a signal of liquidating your existing long positions, though. Volume can be used to predict breakouts. In order for a Support or Resistance levels to break, price needs to have a strong, rising volume. This shows the willingness of market participants to break the psychological level. If, as price approches a certain level, volume is rising - it is likely that this level will be broken. The opposite is also true: If volume is weakening the level will probably not be broken. Most 'fakouts' (false breakouts) happen on light volume or when volume does not rise when meeting the psychological level.

Trading Tip: Pullback should be accompanied by lighter volume, because it is not an actual trend but merely a retracement. If a pullback is accompanied by rising volume this may result in a reversed breakout of the level and the pullback failing.

Volume Trading Principals

1. Volume must confirm the trend - Lack of correlation between Price and Volume shows weakness of trend.
2. Strong Volume at Breakout will confirm the breakout validity.
3. If Volume is rising when price advances towards a psychological level - it implies that the level is likely to be broken. The opposite is also true.

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