What Is Volume Analysis?
Let me explain volume analysis directly to you: it's the process of looking at how many shares or contracts of a security are traded in a specific time frame. As a technical analyst, I use this as one key factor in making trading decisions. When you combine volume trends with price movements, you can figure out how meaningful those price changes really are.
Key Takeaways
You need to know that volume analysis looks at relative or absolute shifts in an asset's trading volume to predict future price directions. Volume signals market strength—think of rising markets with growing volume as solid and healthy, but when prices drop with rising volume, the downward trend is building force. Tools like the positive volume index (PVI) are part of this in technical analysis.
Understanding Volume Analysis
All kinds of analysts in the financial markets use volume analysis for specific securities. Volume usually means the number of shares traded each day. It's useful to compare the whole market's trading volume against a single security's volume to spot trends.
High trading volumes often tell you about investors' views on a market or security. For instance, a big price jump with a big volume spike could mean a bullish trend is continuing or reversing. On the flip side, a major price drop with high volume might signal a bearish trend persisting or starting.
As a technical analyst, I always recommend including volume charts in your daily setups. These charts sit below candlestick graphs and often show moving average trendlines.
Adding volume to your trading choices gives you a fuller picture of market factors affecting a security's price, leading to smarter decisions.
Volume Indicators
In technical analysis, two common indicators that factor in volume are the Positive Volume Index (PVI) and Negative Volume Index (NVI), created by Paul Dysart in the 1930s. They gained traction in 1975 through Norman Fosback's book 'Stock Market Logic'.
Both PVI and NVI use the previous day's volume and the security's price. PVI updates when volume rises from the day before, and NVI updates when it falls. These show how volume influences price.
If PVI goes up or down, it indicates price shifts driven by high volume. If NVI changes, it means prices are moving without much volume impact.
Many investors see noise trading as key in PVI, so they track NVI for clues on what professional traders are doing.
Calculating the Positive Volume Index
Here's how you calculate PVI if today's volume is higher than yesterday's: PVI = Previous PVI + ((Today's closing price - Yesterday's closing price) / Yesterday's closing price) * Previous PVI.
If today's volume is lower, PVI stays the same.
Negative Volume Index
For NVI, if today's volume is less than yesterday's: NVI = Previous NVI + ((Today's closing price - Yesterday's closing price) / Yesterday's closing price) * Previous NVI.
If today's volume is higher, NVI doesn't change.
Important Note
Remember, this information isn't tax, investment, or financial advice. It's general and doesn't consider your personal investment goals, risk tolerance, or finances—it might not suit everyone. Investing carries risks, including potential loss of principal.
