In addition to technicians, fundamental investors also take notice the numbers of shares traded for a given security.
Bottom line, the volume indicator is one of the simplest methods for observing buying and selling activity of a stock at key levels. The tricky part is volume can provide conflicting messages for the same setup. Your ability to assess what volume is telling you in conjunction with price action can be a key factor in your ability to turn a profit in the market.
What is Volume?
Volume represents all the recorded trades for a security during a specified period. This specified period can range from daily charts to 1-minute charts.
Most trading platforms, Tradingsim included, print each volume bar as either green or red. Green bars are printed if the stock closes up for a period and red bars indicate a stock closed lower for a given period.
This color coding need not mean there was more down or up volume for the period; it just represents how the stock closed.
This is a prime example where a stock may have broken a high from a few weeks ago, but is unable to break the high for the current day. As day traders, you want to wait until the high of the day is broken with volume.
A key point for you is every swing high does not need to exceed the previous swing high with more volume. I used to obsess over this and if I didn’t see more volume I would walk away from the trade. Looking at the chart of Netflix above, do you honestly think the stock will exceed the first 5-minute bar with increased volume? Of course not!
While this charting example did not include a break of the daily high, when you look for stocks that are breaking highs, just look for heavy volume. Please don’t beat yourself up because the 9:35 bar had 150,000 shares traded and the break of the high at 10:10 am only had 132,000.
Now if you see a break of a high with 50% or 70% less volume, this is another story. Again, if we are within the margins, please do not beat yourself up over a few thousand shares.
In a perfect world, the volume would expand on the breakout and allow you to eat most of the gains on the impulsive move higher. Below is an example of this scenario.