There are certain points which we need to remember while analysing volume, some of them are discussed here:-
1. Volume analysis is a self-reliant analysis; no special automated software is needed for judgments. Many volume indicators are available but if one doesn’t want to use them there is no major problem. As it is a behaviour analysis of price with associated volume, it can be best judged by an individual him/her self. Of course, to have a strong grip on this behaviour analysis takes time but it’s worthwhile.
2. Volume cannot alone be used as for confirmation of price movement, certain other factors should also be considered for instance; Trend analysis – the ongoing trend which leads to present price movement, Pattern formation analysis – if any chart pattern is forming and if yes is the price breaking out, if the price is taking support or facing resistance at certain level etc.
3. Volume either supports price action or goes in anomaly with it.
As single price action is represented by single candlestick associated with single volume bar. If we want to validate today’s price action we will compare today’s volume bar with previous volume bars. So let us see how volume supports price and go in anomaly with it;-
- Strong price action is supported by high volume and weak or small price action is supported by low volume which shows price and volume are working simultaneously.
- Now if strong price action is associated with low volume or weak or small price action associated with high volume, what do these anomalies represent? If strong price action is associated with low volume, this could be an indication of price testing or fake price movement and if weak or small price action is associated with high volume, this could represent the indecisive or weak market.
As single price action is represented by single candlestick associated with single volume bar, a trend is represented by multiple candlesticks associated with multiple volume bars. If volume increases with consistent rise or fall in price, it represents strong uptrend or downtrend respectively but if volume decreases with consistent rise or fall in price, it represents a temporary move or a weak trend. This is how volume validates the true trend.