9. THE INTERPRETATION OF VOLUME

Chartists employ a two-dimensional approach to market analysis that includes a study of price and volume. Of the two,price is the more important.However,volume provides important secondary confirmation of the price action on the chart and often gives advance warning of an impending shift in trend (See Figure 9-1).


Volume is the number of units traded during a given time period,which is usually a day.It is the number of common stock shares traded each day in the stock market.Volume can also be
monitored on a weekly basis for longer-range analysis.


When used in conjunction with the price action,volume tells us something about the strength or weakness of the current price trend.Volume measures the pressure behind a given price
move. As a rule, heavier volume (marked by larger vertical bars at the bottom of the chart) should be present in the direction of the prevailing price trend. During an uptrend, heavier
volume should be seen during rallies, with lighter volume (smaller volume bars) during downside corrections. In downtrends, the heavier volume should occur on price selloffs. Bear
market bounces should take place on a lighter volume.

Volume Is an Important Part of Price Patterns

Volume also plays an important role in the formation and resolution 

of price patterns. Each of the price patterns described 

previously has its own volume pattern.As a rule, volume tends

to diminish as price patterns form.The subsequent breakout that 

resolves the pattern takes on added significance if the price 

breakout is accompanied by heavier volume. Heavier volume 

accompanying the breaking of trendlines and support or resistance 

levels lends greater weight to price activity (See Figure 9-2).

On-Balance Volume (OBV)

Market analysts have several indicators to measure trading 

volume. One of the simplest, and most effect, is on-balance volume 

OBV). OBV plots a running cumulative total of upside ver-

sus downside volume.Each day that a market closes higher, that 

day’s volume is added to the previous total. On each down day, 

the volume is subtracted from the total. Over time, the on-balance 

volume will start to trend upward or downward. If it 

trends upward, that tells the trader that there’s more upside 

than downside volume, which is a good sign.A falling OBV line

is usually a bearish sign.


Plotting OBV

The OBV line is usually plotted along the bottom of the price 

chart. The idea is to make sure the price line and the OBV line 

are trending in the same direction. If prices are rising, but the

OBV line is flat or falling, that means there may not be enough 

volume to support higher prices. In that case, the divergence 

between a rising price line and a flat or falling OBV line is a negative 

warning (See Figure 9-3).

OBV Breakouts

During periods of sideways price movement, when the market 

trend is in doubt, the OBV line will sometimes break out 

first and give an early hint of future price direction.An upside

breakout in the OBV line should catch the trader’s eye and 

cause him or her to take a closer look at the market or stock in 

question.At market bottoms, an upside breakout in on-balance

volume is sometimes an early warning of an emerging uptrend 

(See Figure 9-4).

Other Volume Indicators

There are many other indicators that measure the trend of 

volume—with names like Accumulation Distribution, Chaikin 

Oscillator, Market Facilitation Index, and Money Flow. While

they’re more complex in their calculations, they all have the
same intent —to determine if the volume trend is confirming,
or diverging from, the price trend.