Stock Volume: How to Use Volume in Charts Like a Pro

What Does Volume Mean In Stocks? Learn to Use Volume Indicators & Volume Charts to Help Predict Stock Price Moves, Like a Pro Technical Analyst.

Volume is one of the most crucial stock chart indicators used by market analysts to assess a given stock or index’s supply and demand situation.  In this article, you will get the critical knowledge to help you interpret stock price action.

What is Stock Volume?

Stock volume is the count of the number of shares traded in a given time period, usually daily for a typical chart. For any given transaction, there is a buyer and a seller; the stock volume is a count of the number of shares exchanged between a buyer and a seller. Stock volume is the count of shares traded, not the dollar value of the shares exchanged.

What is Volume in the Stock Market?

On average, in 2020, 50 billion stocks were traded every month, and the total number of shares traded was over 650 billion for the S&P 500 index. During times of stock market volatility, for example, in 2008, the volume of stocks traded topped 1.3 trillion for the year.

What does Volume Mean in Stocks?

Volume in stocks refers to the total number of shares traded for a particular period.  If 2 million shares are traded in a day, the day’s trading volume is 2 million. Importantly this means that 2 million stocks change hands from buyer to seller. It is not the total value of the stock traded; it is the number of shares traded.

What is the Volume Stock Chart Indicator?

The Volume indicator on a stock chart is usually expressed as a histogram (series of vertical bars) at the bottom of a chart.  If 20,000 shares were traded, then the bar will show 20,000. The changes in volume from day to day indicate that a stock is more in demand if the volume bar rises and the stock price increases or less in demand if volume drops on price decreases.

Is the Volume Indicator Important?

Yes, volume indicators in technical analysis are considered important, second only to the stock price trend. Combining the stock price movement with the increases or decreases in volume provides an insight into the supply and demand and sentiment of the market participants. Important volume indicators are “Volume Bars,” “Equivolume,” and “Volume at Price.”

For example, if the stock price is going up and the volume is going down, that indicates that there fewer people buying at a higher price.  This means a change in demand and a potential change in the direction of the stock price.

Stock Chart Volume Color

Volume bars on a stock chart can be configured to be either red or green.  The bar’s color indicates if there was a positive volume or negative volume for the time period.  A red volume bar indicates the close price for the time period was lower than the open price.  A green volume bar indicates that the close price was higher than the open price.

What is Green Volume on Stock Charts?

If you see a green volume bar in a stock chart, it means that the stock price for the selected time period has a close price higher than the open price. This means the volume was positive; essentially, the stock’s demand exceeded supply, therefore pushing the price up. Multiple green volume bars are a bullish indicator.

What is Red Volume on Stock Charts?

If you see a red volume bar in a stock chart, it means that the stock price for the selected time period has a close price lower than the open price. This means the volume was negative, the supply of the stock exceeded demand, therefore pushing the price down. Multiple red volume bars are a bearish indicator.

Stock Volume Chart: Green Volume, Red Volume. How to Read Volume on Stocks
Stock Volume Chart: Green Volume, Red Volume. How to Read Volume on Stocks

Stock Chart Volume Color Example.

Look at the chart below for NetFlix (NFLX). Please take a close look at volume and price and what they have in common.

The volume indicator is configured to show a RED Bar if the closing price for the stock is lower than the opening price meaning “Negative Volume,” and green for days where the closing price is higher than the opening “Positive Volume.”

Volume in Stock Charts

Reading volume on stock charts is simply understanding supply and demand.  High volume on stock price increases means the stock is currently undervalued and is in demand. High volume on stock price decreases means that the stock might be overvalued and is under selling pressure.

Sometimes the volume indicator bar is so large; it usually indicates a change in the stock price trend; this brings us to the topic of Blow Off Volume.

What do you see in the Volume Chart?

  • What happened to volume when the price changed?
  • What happened to the price when volume spiked?

Volume “Blow off Top” & “Blow off Bottom”

Now look at the chart below and read further for a description of the key concepts here. The chart maps Price, Moving Averages 10 & 30, and Volume (Red for Negative, Green for Positive).

Volume - Detailed 3 Step Analysis & Usage
How to Read the Stock Chart Volume Indicator – Detailed 3 Step Analysis & Usage

How to Read Volume in a Stock Chart.

1. Look at Price Direction & Volume Levels

Price Direction Changes Upwards, Surge In Volume

Here at point 1, we see a huge change in the direction of price; it was proceeding in a downward direction, then suddenly there was a spike in volume over two weeks; this is known as a “blow-off bottom.”

It indicates that a key price has been found, where the sellers have lost enough that they need to sell the stock, and the buyers have seen the price decrease enough so that they see real value in the stock. Of course, other factors contribute, like good news or earnings results. Whatever happened, volume increased!

2. Observe if Price Direction Changes on Increased Volume

Price Direction Change Down, Surge In Volume

The stock here increases from $20 to $38 in the following three months, a 90% increase, but how would we know this was about to happen. Well, buying when the moving averages crossed over would have been a good option; it would not have provided the full 90%, but it would have produced 40%, which by anyone’s reckoning is an excellent result.  However, here we see a monster “Blow off Top,” the huge red Spike; this is a powerful sign to sell as soon as possible.

From stage 2, we see the stock move in a sideways pattern and eventually decrease back down to $19; the ride is well and truly over. However, you would not own the stock, as you would have sold when the moving averages crossed.
The stock price starts to increase in mid-November 2008, but volume tells us nothing.

WHY?  Indicators do not tell us something 100% of the time, but we need to recognize it when they do.  The moving averages cross at $25, a good time to buy.

3. Look for High Volume & Price Increases

Huge Volume and Price Increasing

Here we see massive buying; the volume goes through the roof. Important to note here is we are comparing volume for the stock in comparison to its history. This is the second biggest volume surge of the year for Netflix and is significant.

Why did it take off? We should always seek enlightenment!

It reported excellent earnings, and because of the recession, people were switching from buying bigger ticket items such as Cars and Plasma TVs to staying at home and renting movies. Netflix reported a massive increase in new members.

In the chart, this note shows that the price “Gapped Up.” What does this mean? This means that the stock price in extended-hours trading was so strong that the Opening Price on the following day was significantly higher than even the High for the previous day, thus showing a gap in the chart’s price pattern.

Warning: Some volatile stocks show a lot of Gaps in price. While price gaps might sound good when they gap upwards, if they gap down against you, then they are terrible. Avoid stocks with any history of strong negative gapping as gaps do not allow you to sell at the price you want to.

3 Step Analysis Summary

Volume is important, and reading it should become second nature. When searching for winning stocks, we ideally should look for stocks with increased volume, so we have more chance of a quicker, less risky win.

A Volume Chart will always show Red Bars when the stock price has decreased for the day and Green Bars when the price rises for the day.

The Best Volume Indicator

While there are no “best” volume indicators, there are three essential volume indicators.  The Volume Bar indicator is the most used and indicates supply and demand for a time period.  The Volume at Price indicator shows the supply and demand at a specific price level.  Finally, the EquiVolume indicator overlays the volume onto the width of the price bar.

Which one is the best depends on what you are looking for?

1. Stock Market Volume Bars

The Volume Bar Chart enables you to visualize supply and demand for a given stock at a specific minute, hour, day, week, or month. This is the most commonly used volume indicator in the technical analysis of stocks and commodities.

Stock Market Volume Chart - Red bars when price decreases for the day, green bars for when the price rises for the day.
Stock Market Volume Chart – Red bars when price decreases for the day, green bars when the price rises.

2. Volume at Price / Volume by Price Indicator

The Price at Volume (VAP) chart displays a horizontal bar overlayed on the price chart to provide insight into the number of stocks traded at a specific price point. This shows you the potential supply and demand variance or potential pivot point at a price level regardless of time.

Volume at Price Indicator
A Candlestick Chart, with Price at Volume mapped on it. The Volume at Price Indicator Shows the Trading at a specific Price Point.

3. EquiVolume Stock Market Volume Chart

EquiVolume attempts to provide the solution of Volume at Price differently.  Instead of plotting volume in separate bars, it is, in fact, incorporated into the price bars themselves. The wider the price bar, the more shares were traded during that period. It is an interesting concept that allows you to visualize volume and price uniquely.

Equivolume - Volume Indicator Distorts Trendlines
Equivolume – Volume Indicator Distorts Trendlines

4. Combining VAP and Volume Bars

Perhaps the best way to visualize volume is by using the VAP indicator and the volume bars together on the same chart. This enables you to see the volume at a specific price point and the volume along the timeline.

Volume at Price and Volume Bars Mapped onto a Single Stock Chart Provides Key Insights.
Volume at Price and Volume Bars Mapped onto a Single Stock Chart Provides Key Insights.

Get Volume at Price Bars with Award-Winning TC2000 Charting Software

What Does High Volume Mean in Stocks?

High volume in stocks can mean two things. High volume when the price is decreasing means there are more sellers than buyers; a sell-off.  High volume when the stock price is going up means there is a rally in the stock price, meaning more buyers than sellers, which increases demand, which pushes stock price up.

What is Good Volume for a Stock?

Try to stick to trading stocks with at least $1 million traded per day.  That means Stock Price * Volume = $ Volume Traded.  There is another easy way to see if a stock has enough volume.  If you see large gaps between the open and closing price for any stock, it means there is not enough liquidity in the stock.  This means not enough volume for good liquidity.

Penny stocks often do not have enough volume.  For example, if the stock price is $1 and the volume is 5,000, that means only $5000 of stocks is traded in a single day; that is not for a fair and equitable market.

4 Golden Rules for Stock Volume

There are some important characteristics of volume and price in the marketplace.  It is all about the direction of price movement compared to the increases or decreases in volume.  In short, it is about Buyers and Sellers.

1. Price Up & Volume Up (PUVU)

Stock Price moves higher on increased volume. This is bullish as it shows us that more participants are interested in selling the stock at higher prices, and most importantly, more people are interested in buying the stock at those higher prices.  In an uptrend, this signals the trend will continue; in a downtrend, this signals a possible correction or change in the trend’s short-term direction to upwards.

2. Price Up & Volume Down (PUVD)

In an uptrend, this is very bearish as it suggests that although prices are rising, there are fewer participants suggesting people are backing away from the higher prices.  This also infers that the trend is weakening.  In a downtrend, it suggests a continuance of the downtrend.

3. Price Down & Volume Up (PDVU)

In a downtrend, this signals that a change in trend is likely; as we saw with the “Blow off bottom,” there might be a huge selling climax, then the trend adjusts from down to sideways or down to up.  In an uptrend, this may indicate a crisis, panic selling, or simply when a stock is going out of favor.  The pressure is on the sell-side, and to sell, they have to accept lower prices. A strong negative signal!

4. Price Down & Volume Down (PDVD)

In a downtrend, this suggests that the retreat is slowing or beginning to end as fewer people are interested in buying or selling the stock at these prices.  In an uptrend, this may indicate the stock is stopping for breath or due to a pullback before continuing on its upward trajectory.   Volume tends to trend in the same direction as the price trend, so PDVD also suggests a continuation of the main downtrend or a pullback and possible continuation of an uptrend.

So you see not only the price but the direction of both price and volume is important.  This is where the Price Volume Indicators play an important role.

For the most comprehensive training on all major stock chart indicators and technical analysis, check out our PRO Training.

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This was a lot of information, and it is an important tool in your toolbox.

9 COMMENTS

  1. Just happened across your site.
    I agree, Volume is greatly underestimated by most traders and gives a very important edge to those that understand its value.

    Keep up the good work. I will toddle of and have a look at the rest of your site.

    Regards

    David

  2. hi Barry,

    Same thing happened with me as with Clarence, couldn’t understand a word the other guy wanted to say but I think I got something big out of your post. Thanks for your post.

  3. The ‘GAP UP” info was VERY enlightening, thanks so much for a great article. (But please, start using brighter charts which us older people can see 🙂 )

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