Volume Analysis — The Signal That Confirms a Trend

Overview: Price Can Lie, Volume Can’t

Price can move briefly on light trading. But whether many participants agreed with that move is what volume tells you. Dow Theory’s fifth tenet — “volume confirms the trend” — is exactly this.

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1. What Volume Means

Volume is the number of shares traded in a period. Rising volume means buying and selling agreed (executed) actively at that level — the size of the market’s interest and energy.

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2. The Four Price-Volume Relationships

Price	Volume	Interpretation
Up	Rising	Healthy rise — trend likely to continue
Up	Falling	Weakening momentum — watch for a top
Down	Rising	Strong decline — possible panic selling
Down	Falling	Selling exhausted — possible bottom

Core intuition: when trend direction and volume rise together the trend is healthy; when they diverge, suspect a reversal. A new high on shrinking volume warns that the rally is losing strength.

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3. Judging Breakout Validity by Volume

The strongest clue for filtering the false breakouts (whipsaws) from Lesson 4 is volume.

• Real breakout: volume surges to 1.5–2× normal as it clears resistance
• False breakout: slips past without volume, then snaps back

In a genuine breakout, the volume bar on the very candle that closes above resistance is noticeably taller than usual.

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4. Volume Profile

Volume profile shows how much volume accumulated at each price level. A price level with heavy volume = a thick node acts as strong support/resistance.

• Trading above a thick node → that node acts as support
• Trading below a thick node → that node acts as resistance (trapped holders selling at breakeven)

Low-volume gaps tend to be traversed quickly by price.

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5. OBV — Accumulating Volume to See Flow

OBV (On Balance Volume) adds the day’s volume on up days and subtracts it on down days, cumulatively.

$$\begin{aligned} \text{Close up} \to OBV + &= \text{day}'s \text{volume} \\ \text{Close down} \to OBV − &= \text{day}'s \text{volume} \end{aligned}$$

• Price flat but OBV rising → hidden accumulation → bullish lead signal
• Price rising but OBV falling → distribution → bearish warning (divergence)

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Key Takeaways

1. Volume is the market’s “scale of agreement” with a price move — the fuel of a trend.
2. Price and volume rising together = healthy trend; divergence suspects a reversal.
3. A real breakout comes with surging volume — distrust breakouts without it.
4. Thick volume nodes act as strong support/resistance.
5. OBV reveals hidden supply/demand through price-volume divergence.

Next lesson: We enter the world of indicators derived from price and volume — RSI and Stochastics for overbought/oversold, MACD and Bollinger Bands for trend and volatility.