Trading Volume: When Does It Confirm a Price Move?
Price tells you where a stock went; volume tells you how many shares changed hands along the way. A move on heavy volume is not the same as the same move on light volume, and the difference shows when you compare today's volume with its average, not the raw number.
What you will learn
Compare today's volume with its average instead of the raw number.
Tell a high-volume move from a low-volume one.
Know the limits of volume, especially in thinly traded stocks.
The lesson as a short video · 24 seconds · Watch on YouTubeIn this lesson
Volume is the number of shares that changed hands in a session. The number alone says little: a million shares can be an ordinary day for one stock and an exceptional one for another. So we compare today's volume with the stock's own average over a recent period, such as the last 20 sessions. That ratio tells you whether today is quiet or out of the ordinary.
Average of the last 20 sessions400,000
Today's volume1,000,000
Relative to average2.5×
Twenty earlier sessions averaging 400,000, and today at 2.5 times that.
ExampleAn invented company's stock averages 400,000 shares a session over the last 20 sessions. Today 1,000,000 shares traded. The ratio is 1,000,000 ÷ 400,000 = 2.5: today is two and a half ordinary days. Had only 240,000 traded, the ratio would be 0.6, below normal. If the session is still running, comparing the volume so far with an average of full sessions can mislead you: compare after the close, or with the same time of day in earlier sessions.
When does volume "confirm" a move?
When the price makes a clear move, such as clearing resistance or rising by a large percentage, look at volume. Above-average volume means more activity and more shares traded than usual. That can strengthen your reading of the move compared with the same move on weak volume, but on its own it does not tell you how many took part or who they were.
The same rise on high volume
Up 3% on 2.5 times average volume: more activity than usual
The same rise on low volume
Up 3% on 0.6 times average volume: less activity than usual
The same candles and the same 3% rise. The whole difference is in the blue volume bar.
And "confirm" here has a narrow meaning: volume measures how much traded during the move, not that the move will continue. A high-volume move can reverse, and a low-volume move can carry on.
The limits of volume
Volume has no directionEvery share sold was bought. High volume on a down day means more activity than usual in the fall.
One trade can change the pictureIn a thinly traded stock, a single large trade can multiply volume without any real pickup in trading.
The average movesAfter heavy days the average itself rises, so the same number looks smaller.
Watch outBefore building a reading on high volume, check the number of trades too. A million shares in 900 trades is not a million shares in 3 trades.
Turn on the volume bars
Open any stock chart with the volume bars shown. Find the tallest bar of the last three months and see what the price did that day.