Volume plays a crucial role in determining the trend and strength of a stock or an index. Volume, purely in layman terms, is defined as the number of shares traded during a given period of time. A continuous rise in volumes for a few sessions suggests a strong bias for the traded unit - be it a stock or the index. The trend depends on the positive or a negative close.
Candle formation on the chart also assists in developing a strong confirmation, where a large bullish or bearish candle affirms a stronger momentum on either side. Even candlestick patterns like Morning Star, Evening Star and Bullish / Bearish Engulfing help in giving proper confirmations as to where the index / stock is headed. Such formations with rising volumes advocate a robust move.
How to identify a trend based on Volumes?
- Rising volumes for 2-3 sessions with a positive close indicates a strong underneath strength.
- The price is rising /falling with low volumes shows change in trend in coming sessions. It does support in reversal as well.
- An unexpected rise or fall in volume either suggests indecision or an uncertain development. It could also mean the traded unit could be consolidating.
- A stock or index having gap up with high volumes shows the recent reversal has become the bottom.
- On a breakout / breakdown, if the stock is having low or average volumes, then the probability of a stock witnessing a corrective move is higher.
Typically, the volumes of the current session are compared with last two - three sessions' volume to figure out a short-term trend. From a medium-term perspective, the weekly chart with three - five sessions assists in providing signals.