Reading Stock and Futures Charts - continued
Introduction to Volume
OverviewMost of the time, the higher the day's volume the more price will move either up or down that day. Changes of trend (i.e., a trend is when prices move up or down over time) often occur when high volume does not correspond to a corresponding high movement in the day's price. Divergences are important.
The bottom-most panel in the graph below shows the actual volume reported by the exchange. The panel above that: "volume waves" sums the volume as long as it continues to move in one direction, thus making it possible to compare the effort (overall volume) of one group of bars to another. More about this on later pages.
AThis bar was the last of seven straight up bars. The volume (lowest pane) was above average but the price hardly moved. This is a divergence: lots of effort produced a minimal result. Note also how the volume wave shows that the wave ending at 'A' was the largest in this graph (i.e., compared to the other waves).
BHere is another example of above average volume with minimal result. Demand came in (i.e., a wave of buying occurred) and made this bar bounce off the bullish trend's support line (the dark blue line) ending up with it closing just a little lower than it opened.
CThis bar is colored red because it closed lower than it opened. But the close was above the previous day's close. It is really, therefor, a bullish bar. Rule: a bar is bullish if its close is higher than the previous bar's close.
SummaryVolume and volume waves (very few sites offer volume waves) show the effort that pushes stock and futures prices up and down. Look at the divergences between effort and result.