Interpreting volume in technical analysis

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Nov. 27 2019, Updated 6:40 p.m. ET

Volume in the stock market

In technical analysis, volume measures the number of a stock’s shares that are traded on a stock exchange in a day or a period of time. Volume is important because it confirms trend directions.

volume and stock2

The above chart shows the volume and stock price movement for Chevron’s (CVX) stock.

When the stock price and volume increase, it shows that some fundamental or psychological factors are driving the stock price. An example of a fundamental factor is earnings news. The expectation of an increase in a stock’s price is an example of a psychological factor. When a stock’s price and volume increase, it indicates the buying interest in the stock. It shows the stock’s uptrend.

When the stock price increases and volume decreases, it indicates traders’ indecision to buy the stock. The indecision arises when there aren’t any fundamental or psychological factors influencing the larger market participants. This means there’s a chance that the trend could change.

When the stock price decreases and volume increases, it shows that some fundamental or psychological factors are driving the stock price. This indicates the selling interest in the stock. This also means that there could be a downtrend for the stock.

When the stock price and volume decrease, it indicates traders’ indecision to sell the stock. The indecision arises when there aren’t any fundamental or psychological factors influencing more market participants. This implies there’s a chance that the trend could change.

Volume and pattern are combined to identify the trend direction. Some traders use this combination for entry and exit signals.

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Applying volume concepts

This volume concept can be applied to stocks like Ford Motors (F), General Motors (GM), Tesla Motors (TSLA), and Goodyear Tire (GT). These companies are part of exchange-traded funds (or ETFs) like the Consumer Discretionary Select Sector SPDR Fund (XLY).

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