Volume Analysis and On-Balance Volume
What Volume Measures
Volume represents the total number of shares (or contracts) traded during a specified period. Unlike price, which shows direction, volume indicates the level of participation behind price movements.
High volume suggests strong conviction among market participants. Low volume suggests limited interest or uncertainty. The relationship between price movement and volume provides context for evaluating trend strength.
Core Volume Principles
Technical analysis applies several established principles when interpreting volume:
Principle 1: Volume confirms price trends In a healthy uptrend, volume should expand on up days and contract on down days. In a healthy downtrend, volume should expand on down days and contract on up days.
Principle 2: Volume precedes price Changes in volume patterns often appear before changes in price direction. Declining volume during an uptrend may signal weakening buying interest before price reverses.
Principle 3: Breakouts require volume Price moves through support or resistance levels carry more significance when accompanied by above-average volume. Low-volume breakouts frequently fail.
Reading Volume Data
Volume appears as vertical bars beneath price charts. The height of each bar corresponds to the number of shares traded during that period.
Average Volume Calculation
Average Daily Volume = Sum of daily volumes over n days / n
Example:
| Day | Volume |
|---|---|
| 1 | 2,500,000 |
| 2 | 3,100,000 |
| 3 | 2,800,000 |
| 4 | 2,200,000 |
| 5 | 3,400,000 |
20-day average (using 5 days for simplicity): (2,500,000 + 3,100,000 + 2,800,000 + 2,200,000 + 3,400,000) / 5 = 2,800,000
Volume Ratio
Volume Ratio = Current Volume / Average Volume
Using Day 5 volume: Volume Ratio = 3,400,000 / 2,800,000 = 1.21 (21% above average)
A ratio above 1.5 (50% above average) typically qualifies as notably high volume. A ratio below 0.5 qualifies as notably low volume.
Volume-Price Relationships
The combination of price direction and volume level produces four scenarios:
| Price | Volume | Interpretation |
|---|---|---|
| Up | High | Strong buying; bullish confirmation |
| Up | Low | Weak buying; suspect advance |
| Down | High | Strong selling; bearish confirmation |
| Down | Low | Weak selling; possible exhaustion |
Worked Example: Interpreting Daily Data
| Day | Close | Change | Volume | Avg Vol | Interpretation |
|---|---|---|---|---|---|
| Mon | $50.00 | +$1.00 | 4.2M | 2.5M | Strong up day (volume 1.68x average) |
| Tue | $50.50 | +$0.50 | 1.8M | 2.5M | Weak up day (volume 0.72x average) |
| Wed | $49.75 | -$0.75 | 3.8M | 2.5M | Strong down day (volume 1.52x average) |
| Thu | $49.50 | -$0.25 | 1.4M | 2.5M | Weak down day (volume 0.56x average) |
| Fri | $51.00 | +$1.50 | 5.1M | 2.5M | Strong up day (volume 2.04x average) |
Analysis: Monday and Friday show strong buying conviction. Wednesday shows notable selling pressure. Tuesday's advance and Thursday's decline occurred on light volume, suggesting less commitment from market participants.
On-Balance Volume (OBV)
Developed by Joseph Granville in 1963, OBV creates a cumulative running total that adds volume on up days and subtracts volume on down days.
OBV Formula
If today's close > yesterday's close: OBV = Previous OBV + Today's Volume
If today's close < yesterday's close: OBV = Previous OBV - Today's Volume
If today's close = yesterday's close: OBV = Previous OBV (unchanged)
OBV Calculation Example
Starting OBV: 0 (arbitrary starting point)
| Day | Close | Change | Volume | OBV Calculation | OBV |
|---|---|---|---|---|---|
| 1 | $50.00 | — | 2,000,000 | Starting point | 0 |
| 2 | $51.00 | +$1.00 | 2,500,000 | 0 + 2,500,000 | 2,500,000 |
| 3 | $50.50 | -$0.50 | 1,800,000 | 2,500,000 - 1,800,000 | 700,000 |
| 4 | $51.50 | +$1.00 | 3,000,000 | 700,000 + 3,000,000 | 3,700,000 |
| 5 | $52.00 | +$0.50 | 2,200,000 | 3,700,000 + 2,200,000 | 5,900,000 |
| 6 | $51.75 | -$0.25 | 1,500,000 | 5,900,000 - 1,500,000 | 4,400,000 |
Interpretation: Rising OBV indicates accumulation (buying pressure exceeds selling pressure). Falling OBV indicates distribution (selling pressure exceeds buying pressure).
OBV Trend Analysis
The absolute value of OBV matters less than its direction. OBV that rises consistently suggests sustained buying interest, even if individual day-to-day readings fluctuate.
OBV Confirmation Example
Scenario: Price uptrend with rising OBV
- Week 1: Price $48 → $50; OBV rises from 1M to 3.5M
- Week 2: Price $50 → $52; OBV rises from 3.5M to 6M
- Week 3: Price $52 → $54; OBV rises from 6M to 9M
Price and OBV both rising confirms buying conviction behind the uptrend.
Scenario: Price uptrend with flat OBV
- Week 1: Price $48 → $50; OBV moves from 1M to 2.5M
- Week 2: Price $50 → $52; OBV moves from 2.5M to 2.8M
- Week 3: Price $52 → $54; OBV moves from 2.8M to 3M
Price rising while OBV flattens suggests weakening buying interest. The uptrend may lack the volume support needed to continue.
OBV Divergence
Divergence between OBV and price provides potential warning signals:
Bullish OBV Divergence
| Observation | Price | OBV |
|---|---|---|
| Low 1 (March) | $40.00 | 2,000,000 |
| Low 2 (April) | $38.00 | 3,500,000 |
Price made a lower low, but OBV made a higher low. Volume-based buying pressure increased despite lower prices—potentially bullish.
Bearish OBV Divergence
| Observation | Price | OBV |
|---|---|---|
| High 1 (May) | $55.00 | 8,000,000 |
| High 2 (June) | $58.00 | 6,500,000 |
Price made a higher high, but OBV made a lower high. Volume-based buying pressure decreased despite higher prices—potentially bearish.
Volume at Price (Volume Profile)
Some platforms display volume horizontally, showing how much volume occurred at each price level rather than each time period.
Volume Profile Interpretation
A price level with high volume represents a "high-volume node" where significant trading activity occurred. These levels often act as support or resistance because many participants have positions established at these prices.
Example: Over the past 60 days, Stock ABC traded with this volume distribution:
- $48-$49: 15 million shares traded
- $49-$50: 8 million shares traded
- $50-$51: 45 million shares traded (high-volume node)
- $51-$52: 12 million shares traded
- $52-$53: 5 million shares traded
The $50-$51 range shows heavy participation. If price approaches this range from above, it may find support as traders who bought at these levels defend their positions.
Volume-Based Breakout Validation
When price breaks through support or resistance, volume provides confirmation or warning:
Breakout Validation Checklist
Strong breakout characteristics:
- Volume at least 150% of 20-day average
- Price closes beyond the level (not just an intraday penetration)
- Follow-through volume remains elevated for 2-3 subsequent days
Weak breakout characteristics:
- Volume below average on breakout day
- Price reverses quickly back within the prior range
- Volume dries up immediately after the breakout
Breakout Example
Stock XYZ has resistance at $60.00 with 20-day average volume of 1,000,000 shares.
| Day | Close | Volume | Analysis |
|---|---|---|---|
| Breakout | $61.50 | 2,400,000 | 2.4x average; strong confirmation |
| Day +1 | $62.00 | 1,800,000 | 1.8x average; continued interest |
| Day +2 | $62.50 | 1,500,000 | 1.5x average; healthy follow-through |
This pattern suggests the breakout has legitimate buying support.
Contrast with a failed breakout:
| Day | Close | Volume | Analysis |
|---|---|---|---|
| Breakout | $60.50 | 800,000 | 0.8x average; weak conviction |
| Day +1 | $60.25 | 600,000 | Volume declining; buyers absent |
| Day +2 | $59.50 | 1,200,000 | Failed; volume increases on reversal |
The low-volume breakout attracted no follow-through buying, and the stock reversed.
Limitations of Volume Analysis
Volume does not indicate direction: High volume means high participation, not necessarily bullish or bearish outcome. Selling requires buyers; both sides are active.
Different markets have different volume characteristics: Small-cap stocks may trade 50,000 shares daily while large-caps trade 20 million. Absolute volume numbers lack meaning without context.
OBV binary logic oversimplifies: OBV assigns 100% of volume to buyers on up days and 100% to sellers on down days. In reality, every trade has a buyer and seller.
Volume patterns evolve: A stock's average volume changes over time. Compare current volume to recent averages, not to readings from years ago.
Next Steps
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Calculate the 20-day average volume for a stock you follow, then identify three days where volume exceeded 150% of average and note the corresponding price action.
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Construct an OBV line for 20 consecutive trading days using actual price and volume data, then compare the OBV trend to the price trend.
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Find one example of bullish OBV divergence and one example of bearish OBV divergence on historical charts, documenting the specific dates and values.
-
Analyze a breakout through a well-defined resistance level, recording the breakout day volume ratio and three subsequent days of volume to assess follow-through.
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Compare volume patterns between an up day and a down day of similar magnitude to observe whether volume behavior differs between advances and declines.