The stocks volume plays a big role in determining price movements. In fact many traders consider volume to be the 2nd most important indicator. (2ND only to price movements)
I bet you wonder what exactly volume is. Well volume is an indicator that you can put on your chart. Unlike most indicators it is not developed by a calculation. It simply tells you how many trades took place for a given stock within a given time frame.
For example if a Stocks volume for the day was 1,000,000 shares that means 1,000,000 shares were bought by someone and sold by someone on that day.
Now at first glance this could appear to be a completely useless piece of information. How on earth could that help you? I"ll tell you.
Say stock XYZ broke through a critical price level. It was up 5% today. That is a pretty nice move for one day. Also because it broke through a critical level we would expect it to go up even more.
However let us also say that on that day 400,000 shares were exchanged. On a normal day 1,000,000 shares are traded. Volume is way below average.
It could mean that all the big investors were not trading that day. They could come in the next day and say, “that stock is way too high, I think I"ll sell." Now they cause a panic and the stock goes down the next day.
That is why most investors will not buy a stock when it breaks a critical level unless volume is high. This way we can be more certain that the majority of people think this stock will go up. This offers a greater buy signal then the same signal without high volume.
Also if a stock goes down with little volume it could mean the same thing. The majority of investor were not trading. When they come back they could see this stock and say,"that stock is too low, I think I"ll buy." And the price could go up.
Now this is not saying that if you see a stock go down and only had ¼ of its average volume trading to go out and buy it. We don"t know what the other ¾ of traders who normally trade this stock think. Why? Because they didn"t trade.
For all we know the other 3/4"s will come in the next day and say,"that stock sucks I see why it went down I think I"ll sell." And the price plummets.
That is why traders should use volume only as a confirmation signal. If you like a stock and it broke through a critical level with huge volume than maybe you can jump into that. If that is what your system tells you. Just don"t use volume as a solo indicator.