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by Jens Clever
There is a close connection between price and volume and it is important for every day trader to understand at least the basics of this relation.
Generally speaking, increasing volume indicates a trend continuation and decreasing volume indicates the end of a trend or a reversal. You need to be familiar with this when you are day trading.
Lets have a look at some more detailed scenarios as day traders:
1. A price advance with steady increasing volume
This indicates continuing upward momentum. As the price is climbing, more and more buyers are getting attracted until the stock gets into a stage of euphoria that usually indicates the end of the price advance.
2. A slowing pace of buying with decreasing volume
This indicates that the top is near. This is also referred to as buying which is drying up. It has two possible outcomes:
3. A relatively big volume increase during the price advance with lower volume on the pullback
This indicates a continuing uptrend. The lower volume during the pullback indicates that there are not enough sellers in the market to drive the stock down.
4. Big buying volume without the price going higher
This indicates distribution, which means resistance. A big seller is likely in the market. There is no way to tell yet if the buyers will win this battle and are able to drive the price higher, or if they will give up and the stock eventually reverses.
5. A slow and steady movement upward with consistent volume
This indicates continuing upward momentum. There might be a buyer in the market who is steadily buying shares while trying to not attract too much attention.
6. An extreme acceleration in the price advancing (an almost vertical movement) is usually not sustained
This indicates the end of this stage of the move (euphoric stage). This is a very common scenario. The best example is the Nasdaq market itself in the beginning of 2000; you all know what happened. Those stages of euphoria are very important exit signals for me. They can also present very interesting entry points especially after a stock had a panic sell off. (More articles on day trading.)