Lesson 9 — Why Volume Matters
Learn how trading volume can help confirm price movements.
What Is Volume?
Volume tells us how many shares changed hands during a particular period.
Where Do You See Volume?
On most stock charts, volume appears as vertical bars underneath the price chart.
Price + Volume
Technical analysts often examine price and volume together rather than studying price alone.
The relationship between price and volume can provide useful context.
Why Does Volume Matter?
A price move accompanied by increased trading activity can indicate that more market participants are involved.
Rising Price + Rising Volume
When price rises while volume also increases, it can suggest stronger participation in the upward move.
Rising Price + Falling Volume
A rising price with declining volume can signal that participation is weakening. It does not automatically mean the trend will reverse.
Volume Can Confirm a Breakout
Suppose a share has been trading below resistance for several weeks.
A breakout accompanied by noticeably higher volume can provide stronger confirmation than a breakout occurring on unusually low volume.
Low Volume Breakouts Need Caution
Imagine a share moves above resistance, but only a small number of shares are traded.
Volume Spikes
A sudden increase in volume compared with recent activity is called a volume spike.
A spike can occur around important news, a breakout, a major price move or increased market interest.
Volume Is Not a Buy or Sell Signal
Volume becomes more useful when combined with price structure, trend, support, resistance and other evidence.
🇦🇺 Australian Market Example
Imagine an ASX-listed mining share breaks above a resistance level after trading sideways for several weeks.
Three Simple Volume Questions
1. Is volume increasing or decreasing?
2. Is volume confirming the price movement?
3. Is today's volume unusual compared with recent activity?
These questions are a simple starting point for reading volume.
🧠 Chart Detective
A share breaks above resistance and its trading volume is significantly higher than the previous several sessions. What might this tell you?
Lesson Complete!
You now understand why volume matters when analysing price movements.
Remember:
Price tells you what happened.
Volume tells you how much activity accompanied it.
Next: Understanding Timeframes
Price tells us what happened in the market, but volume tells us how much trading activity accompanied that price movement. This makes volume an important part of technical analysis.
Volume represents the number of shares traded during a particular period. By comparing price movements with volume, traders can look for confirmation, changes in market participation and potentially important areas on a chart.
For Australian investors and traders, understanding volume can be especially useful when studying ASX-listed shares, ETFs and market indices.
What You Will Learn
- What trading volume means
- How volume appears on a stock chart
- Why traders compare price and volume
- Rising price with rising volume
- Rising price with falling volume
- How volume can help confirm breakouts
- Why low-volume breakouts require caution
- What volume spikes can indicate
- How to use volume as part of a broader technical-analysis process
Key Concept
Price + Volume = Better Market Context
When price moves significantly and volume also increases, it can indicate greater participation in that move. When price moves while volume declines, traders may pay closer attention to whether participation is weakening.
However, volume is not a guaranteed buy or sell signal. It should be considered alongside trend, support, resistance, price action and other technical evidence.
Australian Market Example
Imagine an ASX-listed mining company has traded sideways for several weeks. The share price then breaks above resistance while trading volume rises significantly above its recent average.
The higher volume may suggest that more market participants are involved in the breakout. A technical analyst would still look for additional confirmation rather than assuming the breakout must succeed.
Key Takeaway
Price tells you what happened. Volume tells you how much trading activity accompanied it.
Learning to read the relationship between price and volume is an important step towards understanding breakouts, trends and market participation.