InvestorQ : Apart from price trends, are volume trends also important in the technical analysis of stocks?
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Apart from price trends, are volume trends also important in the technical analysis of stocks?

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2 years ago
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For most chartists, a major chunk of technical analysis involves looking at the stock price. However price alone is not the only important statistic in technical analysis. Another equally important, if not more important, number to look at is the trading volume. Volumes in terms of number of shares shows the number of shares that changed during the day or the week or the hour and helps you to take a judgement call on whether the price trend is supported by volumes or not. This helps you to underline reinforced trends in the market.

The trading volume tells you the number of shares that were bought and sold in a particular time frame (usually a day, but it can be shorter too). You can see the volume shown as a bar graph at the bottom of the stock chart. Ideally, you must trust price trends where the volume shifts are also in sync with the price movements. For example, a rise in price supported by thin volumes is not a very reliance price indicator.

Volume is important because it gives context to price movements. It tells you how strong or weak a trend or chart pattern is. Let us look at a real case. If the price of a stock that is in the midst of a down trend starts going up, does it mean the trend changed to an uptrend? That is when you must take a look at the volumes and you’ll find out. If the volume is low, then the trend will probably continue going down and the bounce could be more of a blip or a burst of short covering. If the trading volume is high, it means that there is a strong demand for the stock and the trend will likely change to an uptrend.

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