Decoding Volume Bars

What Is Volume and How Do You Read It?

First, let's establish a clear definition. Trading volume is simply the total number of shares of a stock that are traded (bought and sold) during a specific period. It measures market activity and interest.

On a chart, volume is typically shown as vertical bars at the bottom, directly below the price candlesticks. Let's watch a short video that explains this and shows you how to enable the volume indicator on a charting platform like TradingView.

As the video explained, here are the key points for reading volume bars:

• Height: The height of the bar indicates the total volume traded during that period. A tall bar means high volume (lots of activity), and a short bar means low volume (little activity).
• Color: The color of the volume bar usually matches the color of the corresponding candlestick.
  • A green volume bar corresponds to a green (up) candle, where the price closed higher than it opened. You can think of this as "buying volume" or buying interest.
  • A red volume bar corresponds to a red (down) candle, where the price closed lower than it opened. You can think of this as "selling volume" or selling interest.

It's crucial to understand that a red volume bar doesn't mean there were more sellers than buyers. For every share sold, one must be bought. The color simply tells you that during that period of high activity, the sellers' pressure was strong enough to push the price down.

The Four Key Price-Volume Scenarios

The real power of volume analysis comes from observing its relationship with price. A price move on high volume is significant; the same move on low volume is questionable. This is a core principle with roots in the laws of supply and demand that you are familiar with from your interest in economics.

Let's break this down into four classic scenarios.

Based on that reading, let's summarize the four scenarios in a table. This is a powerful mental model to use when looking at any chart.

This concept of "divergence" (when price and volume move in opposite directions) is a powerful signal that a trend's health is changing.

Practical Application: Confirming Breakouts and Reversals

Now, let's connect this directly to our last lesson on support and resistance. Volume is your best tool for validating whether a breakout or a reversal at these key levels is legitimate.

Confirming a Breakout

When a stock price breaks above a resistance level or below a support level, you want to see a spike in volume. High volume confirms that there is strong conviction and force behind the move, making it more likely to continue.

A breakout on low volume is suspicious. It suggests a lack of participation and increases the chance of a "fakeout," where the price quickly reverses back into its previous range.

Confirming a Reversal

Similarly, if a price hits a support level and bounces up, the reversal is much more convincing if the bounce occurs on high volume. This shows that buyers stepped in aggressively at that level. The same is true for a reversal down from resistance; a spike in selling volume adds credibility to the reversal.

Gauging the Health of a Trend

Finally, you can use volume to monitor the health of an existing trend.

• In a healthy uptrend, you want to see volume increase as the price moves up (the impulsive waves) and decrease as the price pulls back (the corrective waves). This shows enthusiasm on the way up and a lack of selling pressure on the dips.
• In a healthy downtrend, you'd see the opposite: volume should increase on the moves down and dry up on the bounces.

Let's watch one last clip that neatly illustrates this concept and recaps the importance of volume in breakouts.

Conclusion

You now have a powerful tool for adding depth and confirmation to your chart analysis. Price tells you what is happening, but volume helps you understand why and with how much force. By analyzing price and volume together, you can better distinguish strong, high-conviction moves from weak, indecisive ones. This skill is fundamental to both identifying long-term entry points and executing short-term trades with more confidence.

Key Takeaways:

• Volume measures market participation and the conviction behind a price move.
• High volume confirms a trend or breakout, signaling strong participation and sustainability.
• Low volume on a breakout suggests a "fakeout", indicating a lack of conviction.
• Divergence between price and volume (e.g., price rising while volume falls) is a warning sign that a trend may be weakening.
• Always analyze volume in the context of price action. They are two sides of the same coin.

A Look Ahead:
In our next lesson, we will step back and look at the bigger picture. The learning outcome is to recognize the characteristics of bull markets, bear markets, and market corrections to manage psychological biases. The extreme volume spikes you've learned about today often mark the psychological turning points of these major market cycles—the "capitulation" selling at a bear market bottom or the "euphoric" buying at a bull market top. Understanding this will be key to developing the emotional resilience you need as an investor.