When stock price is moving in a range or in sideways direction, volume possibly will point toward in which way the breakout is most possibly likely to happen:-
Use volume to confirm the breakout:
- When prices are increasing with higher volume near the peaks of price chart formation means that an upward breakout is most likely to happen.
- When prices are declining with higher volume near the troughs of price chart formation means that an downward breakout is most likely to happen.
- When price and volume chart shows higher volume like formation immediately after following the breakout, hints that breakout is a healthy breakout.
- When price and volume chart shows lower volume like formation immediately after following the breakout, hints that breakout is a not a healthy breakout and any time it may reverse and triggers stop loss.
Spikes in volume should be cautiously looked since they are seen as a considerably positive or negative sign by the traders. Any stock which has been comparatively very quiet on volume part and suddenly a volume spike in that stock sparks a caution notice in that that sock that something there is going to change in it. A sudden rise in volume can be a forecaster of trend transformation in the stock or at least it suggests the increase in volatility.
Low Volume in Down-Trends in Uptrend
However, there is an important aspect to look at volume is that low volumes do not essentially indicates the termination of a down-trend or uptrend. Commitment from buyers is necessary to drive up prices. Prices can fall due to a lack of interest from both buyers and sellers.
Normal rule while studying volume role in our analysis can be explained in simple and understandable way is to look like; whenever big price candle is formed and beneath that big candle formation volume also supports that move (minimum volume should be at least 2.5 times of past 10 candles average volume) whether the color of the candle is bullish or bearish, shows the beginning of a new trend direction in that stock. Movement afterwards that big volume candle is important to watch. (Refer Above Chart)
Generally, what happens is when there is big candle volume formation market then takes a brief pause and tries to absorb that volume pressure while trading in a range or in sideways or starts going against the trend of the big volume candle. In this case what a trader should do is whenever this brief pause terminates and the stock price starts moving again towards in the direction of big volume candle (Green candle means direction is up and Red candle means direction is down),
and if it breaches its either high or low on candle closing basis we should look for that side of trade with keeping stop loss to the lowest level formed on candle closing basis (V / U or inverted V/U like shape and the bottom of V/U or the high of inverted V/U keeping as our stop loss respectively) (Refer Above Chart)