Stock Trading Strategies > Technical Analysis > Chart Patterns

The Importance of Volume

Let's begin with a common sense theory, volume should follow the trend. That is, in a bullish phase volume should expand on rallies and contract on declines. In a bearish phase volume should expand on declines and contract on rallies.

That's the theory, now here is the common sense. In an uptrend an ever-increasing number of buyers are required to thwart pent-up and natural selling pressures. After all, the higher a stock moves in price the more likely it is that investors that bought the stock at lower prices will want to sell. For the rally to continue these shares need to be absorbed by new buyers. If price advances quickly buyers may step back creating temporary weakness but these periods should be characterized by weak volume if the trend is strong.

When a stock is mired in a bearish trend and the outlook is poor volume should expand on declines because would-be buyers are overwhelmed by sellers. If the stock sinks quickly some sellers will refuse to sell, choosing to wait for a small rally in price. This temporary absence of sellers creates a small vacuum that should lead to a light volume rally. When the stock rallies sufficiently sellers that failed to exit ahead of the first major decline begin selling and once again volume should expand.

O.K., if common sense says that volume should follow the trend what happens when volume does not follow the trend and better yet, what about the importance of volume in consolidations and breakouts? Of course this is a not-so-clever segue to our next section on the importance of volume.

support and resistance in an uptrend volume in trends