Volume: the strength of a move, not its direction

Imagine two cafés. In the first, three guests sit all evening and one of them raises the price of the drinks at his own table. In the second, a crowd pushes towards the bar and everybody wants coffee right now. Both cafés "raised the price", but only in the second does anything real happen. The difference between them is shown by one column under the chart: volume.

What you will learn

• what volume is and how to read it,
• how to calculate relative volume and when to treat it as unusual,
• why volume tells you about the strength of a move, not its direction.

What volume measures

Volume is the number of shares (or contracts) traded in a given interval. On a chart it is drawn as bars under the candles. A tall bar means many market participants were involved, a short one that trading was sluggish.

One key point: volume says nothing about direction. Every trade is both a purchase and a sale, because somebody bought from somebody who sold. Heavy turnover can accompany a sharp rise as well as a sharp fall. Volume measures involvement and conviction, not which side is winning.

The basic rule: confirmed and unconfirmed moves

• A price rise on rising volume is a confirmed move: more and more participants join the buyers.
• A price rise on falling volume is a weaker move: fewer people are pushing it up and it is easy to stop.
• A fall on heavy volume shows the determination of sellers, while a fall on light volume often looks like an ordinary pullback.

Volume matters most at key places on the chart. A breakout above resistance (lesson 2) on clearly elevated volume is more credible than the same breakout in silence. A good test: after the breakout the market should be eager to trade, not yawning.

Relative volume

A raw bar says little until you know what is "normal" for a given company. That is why we use relative volume: the current session's volume divided by the average volume of the last 20 sessions.

• a value around 1 means an ordinary day,
• from 1.5 to 2 "something is going on",
• above 3 is an exceptional day: results, news, a shift in mood.

Such a ratio lets you compare different companies whose normal volume looks completely different.

Volume climax and OBV

Two interesting concepts to finish the theory.

Climax. After a long decline there is sometimes a day of panic: price drops sharply and volume is several times higher than usual. Those who wanted to sell have sold. Such a day is often close to the low, but there is never a guarantee that it is the low, so it is a signal for attention, not for buying.

OBV (On-Balance Volume). A simple cumulative indicator: you add the session's volume to the total when price closed higher than the day before and subtract it when it closed lower. Rising OBV while price stands still suggests that demand is building. It is a hint, not a verdict.

Chart example: GameStop (GME), volume in recent years

GameStop is a stock known for sharp spikes in turnover: there are days when volume is many times higher than usual. It is an extreme case, but that is exactly why everything is visible to the naked eye: how volume rises together with price, how the top of the move falls on days of record turnover, and how quickly the move can reverse after the climax.

Open the daily chart of GME for the last few years and add volume. Find the days with clearly the biggest turnover and ask yourself three questions: which day had the biggest turnover, what did price do in the following days, and did volume return to a normal level after the peak? Remember this is an extreme: in ordinary stocks volume rarely rises so spectacularly.

How it fails

• Data quality. Part of the trading happens off-exchange (so-called dark pools), so free charts show incomplete volume that differs by provider.
• Special days. On index rebalancing days, options expiry or dividend payments volume jumps for technical reasons, not because sentiment has changed.
• No direction. Record volume on a decline does not say it is already the low, and on a rise that it is the top.
• Thin markets. For illiquid stocks a single large trade distorts the picture.

Check yourself

1. What does a price rise on falling volume mean?
2. How do you calculate relative volume and from what value do you treat it as unusual?
3. What is a volume climax after a long decline?
4. Why does volume tell you about the strength of a move rather than its direction?
5. How is the OBV indicator built?

Next lesson

Lesson 5. Candlestick patterns in context: hammer, morning star, engulfing: it sounds like a café menu and can mislead like a fake barista. You will see why the same candle sometimes means something and sometimes nothing, and which single word decides it.

Educational material, not investment advice.