Trading Volume as a Market Indicator

November 12, 2021
Sometimes stock price trends aren't quite what they seem. Here's how to use volume to confirm or refute a trend.

Stock price movements aren't always what they appear. Beneath the surface of a move higher or lower, trends may be forming—or fizzling into a reversal. That's why traders look for other indications of enthusiasm when they want to confirm or refute a price signal. Trading volume, which measures the number of shares traded during a particular time period, can help.

While swings in trading volume may not be enough on their own to reveal changes in a trend, they can give you a sense of how much strength there is behind a move. Here's how you can use volume indicators in your trading. 

What traders look for

In short, above average and/or increasing trading volume can signal that traders are truly committed to a price move, which you can see in Chart 1 below, where the price and volume lines are both increasing. Contrariwise, below average and/or decreasing volume can signal a lack of enthusiasm, which you can see in Chart 2, where volume is declining even as the price continues to creep higher. 

Source: Charles Schwab & Co.

Bullish signals from trading volume

Here are some common ways to use volume to confirm a bullish price move, as well as an example of how volume can undermine a price trend.

Upside breakout with above average volume

During uptrends and in sideways markets, a stock's price will occasionally run into a resistance level—a point where upward trends start to fizzle as selling pressure overcomes buying pressure. When a stock's price breaks through that level, the breakout is generally believed to be more significant if volume is high or above average. A breakout accompanied by low volume suggests enthusiasm for the move may be lacking.

Source: Charles Schwab & Co.

Uptrend accompanied by increasing volume

An uptrend paired with increasing and/or above average volume implies investor enthusiasm for that stock or asset is strong, which could lead to more buying and even higher prices.

Source: Charles Schwab & Co.

An uptrend with decreasing volume

An uptrend without increasing and/or above average volume suggests investor enthusiasm is limited. While the price could continue to rise, many traders who use volume analysis will nevertheless look for other candidates.

Source: Charles Schwab & Co.

Bearish signals from trading volume

Here are some common ways to use volume to confirm a bearish price move, as well as an example of how volume can undermine a price trend.

Downside breakout accompanied by heavy volume

During downtrends and in sideways markets, a stock's price will occasionally run into a support level, which is where downward trends tend to weaken as buying pressure overcomes selling pressure. When the price breaks below a support level, the breakdown is generally believed to be more significant if volume is high or above average. A breakout accompanied by low volume suggests enthusiasm is lacking.

Source: Charles Schwab & Co.

Downtrend accompanied by increasing volume

A downtrend accompanied by increasing and/or above average volume implies investors have doubts about the stock, which could lead to more selling and even lower prices.

Source: Charles Schwab & Co.

A downtrend with decreasing volume

A downtrend without increasing and/or above average volume implies investor concern is limited. While the stock's price may continue to fall, traders who use volume analysis may start to follow the stock and watch for signs of a pickup supported by increasing volume.

Source: Charles Schwab & Co.

As a rule of thumb, any price breakout or trend that is accompanied by above average volume could be considered more significant than price movements that are not.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation, endorsement of any particular security, chart pattern, investment strategy, or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. 

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern, or investment strategy.

Past performance is no guarantee of future results.

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