What is volume?
Volume is the number of contracts traded during a specific time frame - an hour, day, week, year. For financial instruments that are traded in lots, volume is reported to reflect that fact.
Why is volume important?
On its own, volume cannot be used as a technical guide. Volume, however, is very important because of the clues it provides about price movements.
Patterns should never be relied upon exclusively as indicators of the market. Combining a pattern with information about volume, however, a technical analyst can gain insight into both, the pattern and happenings in the market. Volume is an important element in assessing the intensity of price movements.
Investors saying, "price follows volume" is not quite complete. In fact, the measurements of price and volume are coupled in the technical analyst's tool kit. The saying should be amended: "price follows volume and volume follows price."
Watching volume is useful in gauging the level of commitment of buyers and sellers. Volume is an indicator of the health of a trend. A healthy uptrend should have higher volume on its upward legs; lower volume on its downward (corrective) legs. Similarly, a healthy downtrend usually has higher volume on its downward legs and lower volume on its upward (corrective) legs. This information, in turn, can be used by investors to position themselves for a possible trend reversal.
What does low volume mean?
Low volume is often an indicator of indecisive expectations about the price of a financial instrument. These indecisive times are characteristic of a consolidation period in which prices are moving sideways. If a primary trend is moving down, volume should decrease once the price begins to rise. If the trend is moving up, volume should decrease once the price starts to decrease.
What does high volume mean?
High volume often occurs when the market has “topped” and there is strong agreement that prices will continue moving upwards. High volume levels are also very common at the beginning of new trends. This would occur when prices break out of a trading range. In addition, when the market hits bottom, volume tends to increase, fuelled by panic selling.