How to identify and benefit from trends based on rising and falling volumes

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?

1. Rising volumes for 2-3 sessions with a positive close indicates a strong underneath strength.
    
2. The price is rising /falling with low volumes shows change in trend in coming sessions. It does support in reversal as well.
    
3.  An unexpected rise or fall in volume either suggests indecision or an uncertain development. It could also mean the traded unit could be consolidating.
    
4. A stock or index having gap up with high volumes shows the recent reversal has become the bottom.
    
5. 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.

While taking a bigger perspective on the trend, the daily volume chart might not perfectly depict the scenario. The weekly, monthly or year volumes chart facilitate in taking a call on the same. A weekly or monthly momentum with strong volumes suggests a bigger rally ahead. Similarly, the volume structure also shows the relevance of the moving averages. Whenever a stock re-bounces nearing the moving averages with significant volumes, then the reversal is said to be firm.

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.

Volume-driven stocks, Source: spidersoftwareindia