How Important is Volume?

Many technical traders will tell you that price is the most important indicator. Many technical indicators are simply price massaged into a fancy blue or red line on one's chart. But volume is a completely different indicator. I believe that volume is a useful and significant data, measuring the amount of action and psychology of the market players.

Volume, of course, simply is the measure of the number of shares of any stock traded during a day. For those who are trading on an intraday basis, intra-day volume bars can be found, or for traders more comfortable with a longer-term view, daily, weekly or monthly volume data can be called up just as easily.

Many technical traders call volume the fuel behind a market move. For a trader who is looking to put on a stock trade, from the long side, knowing how much demand is likely left in the market is an important variable. After all, why would you want to enter the market with a long trade if demand is weakening.

One of the basic rules of thumb for traditional volume analysis is that a healthy uptrend would see expanding volume on up days and contracting volume on down days. Just the opposite would be true for a downtrend. 

In general, some other basic rules of thumb in relation to volume are that bull markets tend to have bigger volume, while bear markets tend to have lighter volume. In a downtrend, traders would like to see increasing volume on down days and decreasing volume on up days.

Be careful if in a bull trend the a stock price hits a new high, but declining volume is seen for that session? This is Red flag time.
Watch out for blow-offs and climaxes. Blow-offs tend to occur at major market peaks, while climaxes emerge at market bottoms. These terms simply reflect a huge amount of volume, which emerges late in a market rally (or decline), with a sudden peak. Prices then abruptly reverse. Be especially careful if you find a sudden drop of price with high volume in a down trend. This can often indicate that stop loss orders have been hit and the price could well turn up again after these orders have been taken up.

Traditional Open Interest and Volume Guidelines:

• If prices are rising and volume is increasing, that represents a strong market;
• If prices are rising, while volume falls, that reveals a weakening market;
• If prices are falling, while volume increases, that represents a weak market;
• If prices are falling, while volume is falling, that represents a strong market.

Bottom Line?
If you've haven't incorporated volume readings or analysis into your trading, it may be worth exploring