How to Use Stock and Forex Volume

If you read the post: How to Choose the Best Technical Indicator, in that post I advise you never to forget to use volume analysis. No matter how good an indicator you use, don't forget volume.

Why is volume so important in technical analysis?

Volume shows the high and low trading activity on a day, or reflects the number of shares changing hands between traders. Volume is used to measure price changes that occur. On a chart, volume is represented by a bar or called a volume bar, and is usually shown below the chart.

If you see a very high volume bar, it means that market participants' interest in a stock is high. On the other hand, the shorter the volume bar, the lower the interest of market participants in a stock. The volume tends to be historically stable, indicating the stock is liquid, and the stock is often traded by investors. In other words, stable volume means that it is almost certain that the stock is not fried stock. Volume description in technical analysis.

Volume is very important you use, because volume can be used to indicate a bullish or bearish signal. How to read volume to generate buy and sell signals? Please see the table below.

If the stock price rises, then it is accompanied by an increase in volume, meaning that market participants have a great interest in the stock, so it is predicted that the stock price will rise the next day (bullish). But if the stock price increases, the volume is even small, it means that market participants' interest in the stock is small. A small volume increase means that market participants do not want the price to rise again, so it is predicted that the stock price the next day will fall (bearish).

If the stock price falls and is accompanied by a decrease in volume, it means that market participants do not want the price to fall again, so the stock price is predicted to be bullish. On the other hand, if stock prices fall but are accompanied by large volumes, it means that many market participants will sell goods. So it is predicted that the stock price the next day will be bearish.

What is the proof that volume analysis can provide buy and sell signals? Take a look at the MNCN coded stock chart below.

If you look at the table below, I have bought MNCN shares. Notice the blue vertical line. You see that after the price of MNCN dropped, suddenly MNCN went up drastically accompanied by a drastic increase in volume. The stock price the next day and the day after tomorrow (I marked with a blue arrow and a green arrow), it rose dramatically.

I accidentally saw that MNCN's stock rose by more than 7%, I checked the chart and it turned out that the stock price had gone up drastically accompanied by a large volume. Finally I bought MNCN. And because the stock price rose drastically the next day (blue arrow) up to 11%, I immediately sold MNCN shares. Volume analysis proved to give a pretty good signal.

But the problem is, is the volume table above really 100% accurate?

In the capital market nothing is 100% correct. If you re-read the previous paragraphs, I always write with the words predictable, and predictable not confirmed. Volume is indeed a super important indicator, because it measures the interest of market participants in stocks. However, all technical analysis is ultimately a prediction, not 100% correct. Volume analysis is also not 100% correct, just like other indicators that can cause divergence (indicators say it goes up, stock prices go down or vice versa).

Look at the MNCN chart below.

If you look at the chart below, you can see the blue circle, MNCN's stock price fell with small volumes. Referring to the table above, the price of MNCN should increase. But the next day instead of going up, it went down 2 days before finally rebounding. Volume analysis is a good idea to combine with several other indicators.

Gotou Sakurajima A female trader from Japan who now lives in Jakarta, Sakura loves Forex and Stock Trading since moving to Jakarta and Sakura loves to write articles about Trading.