Volume: reading conviction

After this lesson you can read volume next to price, and you'll know why the same price move can mean two opposite things.

The second number

Under every candle sits a bar you've been ignoring: volume, the number of shares that traded during that box of time. Price tells you where the auction ended up, and volume tells you how much trading it took to get there. This course is about reading the two together.

The reason volume carries information goes back to School I's roster. The giant funds cannot build or unload positions without trading enormous numbers of shares over days and weeks. They can be patient and split their orders across weeks, and they still cannot trade size without volume happening. Volume is where their footprints show, and reading it is about as close as an outsider gets to watching them work.

Always read volume relative to the stock's own average. Three million shares is a quiet day for one stock and a stampede for another. Charting tools plot a moving average of volume (the 50-day is common); "heavy" means well above that line and "dry" means well below it.

The classic reads

Accumulation. Up days on heavy volume, down days on light volume, repeating for weeks. Buyers are the urgent side and sellers are holding back. When this pattern runs through a base (course 3), someone large is collecting shares, and course 2's Stage 2 often follows.

Distribution. The mirror: down days heavy, up days light. Size is leaving, and rallies are being sold into. Clusters of heavy-volume down days after a long advance are the classic Stage 3 signature. O'Neil made counting them, on the index itself, a cornerstone of his market-health reading (School IV, course 5 picks this up).

The dry-up. Volume shrinking to unusually low levels late in a base. Everyone who wanted out has got out, and the stock goes quiet. Some of the best advances start from exactly this silence, which is why Minervini's volatility-contraction work (course 6) treats shrinking volume as a key ingredient.

Confirmation. A breakout from a base on triple its average volume comes with evidence: real size committed at the new prices. The same breakout on half its average volume happened on air, with nobody of consequence taking part, and moves like that fail at a much higher rate. The two breakouts look identical on a price chart, and the volume is the only thing telling you which one you're looking at.

One honest caution to carry along: volume reading is interpretation, and it's probabilistic. Heavy volume tells you that commitment happened. It doesn't tell you who committed, or what they'll do next. You'll sometimes read it wrong, which is why every position still wears a stop (course 3), regardless of how convincing the volume story was.

Check yourself

1. A stock breaks above its base high on the heaviest volume in six months. What does the volume add to the price event? (Evidence of real commitment at the new prices. Real size took part, and a breakout on quiet volume has none of that.)
2. After a nine-month advance, a stock has five heavy-volume down days in three weeks while rallies come on light volume. Read it. (Distribution: size is transferring out. That's Stage 3 behaviour, and it calls for caution whatever the story says.)
3. Why does volume dry up late in a good base? (The supply is exhausted — impatient holders have finished selling, and nobody's left to push it around.)

The idea this lesson installs

Read every price move with its volume attached.

Next: Course 5 — "Moving averages."