What is Volume Analysis?
Volume analysis examines the number of shares or contracts traded over a given period to assess the strength or weakness of a price move. Volume is often called the one indicator that cannot be faked, because it represents actual capital commitment. A price advance on rising volume suggests genuine buying conviction, while a rally on declining volume warns that the move may lack staying power. Average daily volume for S&P 500 stocks typically ranges from 1 million to over 50 million shares depending on the company.
Key Volume Indicators
On-Balance Volume (OBV) maintains a running total that adds volume on up days and subtracts it on down days, revealing accumulation or distribution trends. The Volume-Weighted Average Price (VWAP) calculates the average price weighted by volume throughout the day and serves as a benchmark for institutional execution quality. Volume Profile plots volume at each price level rather than over time, highlighting high-volume nodes that act as support and resistance. A breakout above resistance accompanied by volume at least 50% above the 20-day average is considered a high-probability signal.
Key Considerations
Volume patterns differ across asset classes. Equity volume is straightforward, but forex volume data from brokers represents only a fraction of the decentralized market. In futures markets, open interest provides an additional dimension alongside volume. Volume tends to spike at market opens and closes, so intraday traders should compare volume to time-of-day averages rather than raw daily averages. Low-volume environments increase the risk of slippage and false breakouts.