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Volume Analysis

Difficulty beginner

Overview

Volume confirms price action. Price moves on high volume are more significant than moves on low volume.

Volume Principles

  1. Volume precedes price — Volume often changes before price direction
  2. Volume confirms trend — Uptrend with increasing volume is healthy
  3. Volume divergence warns — Price rising on declining volume = weakness
  4. Climax volume signals extremes — Extreme volume often marks tops/bottoms
price                                              healthy uptrend       
  │                                          ╱●  (price + volume up)    
  │                                        ╱                            
  │                              ╱╲      ╱                              
  │                            ╱    ╲  ╱                                
  │                          ╱        ╳                                 
  │                ●←─divergence: price up, volume DOWN                 
  │              ╱   ╲        ╱                                         
  │            ╱       ╲    ╱                                           
  │   ●────●╱           ╲ ╱                                             
  │                       ●                                             
  │                                                                     
  └──────────────────────────────────────────────────────────────────   

volume                                                                  
  │                                                  ███                
  │                                              ███  ███               
  │                                          ███  ███ ███               
  │ ███                              ███      ███ ███ ███               
  │ ███      ███      ███ ███       ███       ███ ███ ███               
  │ ███ ███  ███ ███  ███ ███  ███  ███       ███ ███ ███               
  │ ███ ███ ███ ███ ███ ███ ███ ███          ███ ███ ███               
  └──────────────────────────────────────────────────────────────────   
                ↑                ↑                  ↑                   
        volume drying up       divergence    confirming new trend

Volume Indicators

On-Balance Volume (OBV)

If Close > PrevClose: OBV = PrevOBV + Volume
If Close < PrevClose: OBV = PrevOBV - Volume
If Close = PrevClose: OBV = PrevOBV

where: Close current bar's close · PrevClose prior bar's close · Volume bar's traded volume · OBV running cumulative volume tagged by direction · PrevOBV OBV from the previous bar. does: accumulates volume signed by the day's close direction so that net buying pressure compounds upward and net selling pressure compounds downward. Traders read OBV against price for divergence — when OBV makes a new high before price does, it signals accumulation and confirms an emerging uptrend; OBV failing to make a new high while price does flags distribution and warns of a coming reversal.

Signals: - OBV rising with price → trend confirmed - OBV falling while price rises → distribution (bearish divergence) - OBV rising while price falls → accumulation (bullish divergence)

Volume Weighted Average Price (VWAP)

VWAP = Σ(Price × Volume) / ΣVolume

Calculated intraday, resets each session

where: Price typical price of each bar, usually (High+Low+Close)/3 · Volume shares/contracts traded during that bar · Σ cumulative sum since the session open. does: computes the volume-weighted mean price for the session, giving an objective "fair value" reference institutions benchmark fills against. Intraday traders use VWAP as dynamic support/resistance and a bias filter — longs above VWAP, shorts below — and treat pullbacks to VWAP in a trend as preferred entries with stops on a clean break of the line.

Trading: - Price above VWAP → bullish intraday bias - Price below VWAP → bearish intraday bias - VWAP acts as dynamic S/R

Accumulation/Distribution Line

Money Flow Multiplier = ((Close - Low) - (High - Close)) / (High - Low)
Money Flow Volume = MFM × Volume
A/D Line = Cumulative MFV

where: Close bar close · Low bar low · High bar high · MFM money flow multiplier in [-1, +1] — +1 when close prints on the high, -1 on the low · MFV signed money flow volume for the bar · A/D Line running sum of MFV across all bars. does: weights each bar's volume by where the close lands inside the range, then accumulates that signed volume to estimate net buying versus selling pressure. Traders compare the A/D Line slope to price for divergences — a rising A/D Line into falling price signals stealth accumulation, while a falling A/D Line into rising price signals distribution and warns the rally lacks volume conviction.

Volume Profile

Key Levels: - POC (Point of Control): Price with highest volume - Value Area: Range containing 70% of volume - High Volume Nodes (HVN): Support/resistance - Low Volume Nodes (LVN): Price moves through quickly

Volume Patterns

Pattern Interpretation
Price up, Volume up Healthy uptrend
Price up, Volume down Weakness, potential reversal
Price down, Volume up Strong selling pressure
Price down, Volume down Selling drying up
Volume spike Climax, potential reversal point
Volume dry-up Consolidation, waiting for catalyst

Practical Guidelines

  1. Volume is Context — Always check volume alongside price
  2. Compare to Average — Current volume vs. 20-day average
  3. Intraday Pattern — Volume U-shaped (high at open/close)
  4. Relative Volume — Volume relative to same time of day
  5. Divergence is Key — Volume/price divergence warns of changes

Next Steps