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Volume is perhaps one of the most overlooked tools in the technical analysis kit. One reason is that it has traditionally been very difficult to obtain reliable and accurate data. Now, most exchanges are electronically controlled and the volume information is readily available, if not always totally accurate, as trades can be delayed in their reporting. Volume, however, is discarded by many because they find its interpretation a ‘black art’. Yet it can be so illuminating.

Think of it as a plane flying straight and level. The plane represents price, its journey is time. The plane’s ability to climb and descend is governed by the application of power to the engine. Power represents volume. A plane will not climb unless power is applied, yet give it too much fuel and it will stall and start to slip backward. Likewise, as the plane descends, power is again needed to maintain control and to end the descent for the next leg of the journey.

So, when raised volume accompanies an upside breakout, you can be pretty sure it’s the start of a genuine upmove. As the move gathers pace you expect to see healthy volume levels but not too much; only when the volume starts to tail off should you become suspicious as to whether the trend will continue.

Likewise, when a decline begins, look for initially raised volume, and again when, as often happens toward the end of a downtrend, the market has a cathartic sharp sell-off and the power is once more applied, volume jumps at this switch-over point. In general, volume will be expected to be heavier in the direction of a prevailing trend and lighter during any correction to that trend. Exceptionally weak volume can also be an alert to the possibility that the current move is suspect. Measure volume against its long-term average to gain a quick insight as to whether it is high or low relative to normal variation.

When assessing volume, it is equally important to relate what actually happens to price as a result of volume. Look both at the net change between bars, at the result of any high volume on the following bar and where the close on a bar is in relation to the range of the bar on which it sits. This will guide you to an interpretation as to whether the volume represents buying or selling, irrespective of any trend and, for short-term trading, can be a very powerful technique to master.