In order to make conclusions about future price movements, volume analysis examines relative or absolute changes in an asset's trading volume. Rising markets on increasing volume are often considered as strong and healthy, hence volume can be an indicator of market strength.
Volume is important for two reasons: To confirm price changes: if the beginning of a trend is not accompanied by a rise in volume, the trend is deemed weak and uncommitted. To predict price adjustments: gains in volume frequently precede pricing changes.
Because stocks or markets with the largest volume are the most liquid and considered the best for short-term trading, there are many buyers and sellers ready to trade at various prices, volume is typically taken as an indicator of liquidity.
Vertical bars representing how many shares changed hands over time often appear at the bottom of a stock price chart. Large, volatile price changes are common on days with higher-than-normal volume, indicating that something is wrong with the stock.
Bullish momentum is indicated by rising prices, whereas bearish momentum is indicated by declining prices. An examination of price vs. volume can also aid in detecting momentum. If the price is rising on low volumes, it means the bullish trend is losing steam and a trend reversal is imminent.
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