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Volume is used for two major purposes:
To confirm price changes: if the start of a trend is not accompanied by an increase in volume it is considered to be weak and lacking commitment.
To anticipate changes in price: increases in volume often precede changes in price. See Accumulation and Distribution for more detail.
Volume measures the “worth” of a market move. If a currency pair has a strong price move either up or down, the perceived strength of that move depends on the amount of volume for that period. Moves backed by higher volume are more significant. By monitoring volume, a trader should not be left behind on important market moves. Important moves will usually come on a spike, or a short period of time when there is more volume than normal.
Volume is one of the most important technical analysis tools to learn and understand how to apply to price movements. Volume increases every time a buyer and seller transact their stock or futures contract. If a buyer buys one share of stock from a seller, then that one share is added to the total volume of that particular stock. Volume has two major premises:
- When prices rise or fall, an increase in volume is strong confirmation that the rise or fall in price is real and that the price movement had strength.
- When prices rise or fall and there is a decrease in volume, then this is interpreted as being a weak price move, because the price move had very little strength and interest from traders.
The chart below of Gold futures shows a strong trend being confirmed by a strong increase in volume:
The world is in a state of “late Great Depression,” well-known economist and author Robert Shiller told CNBC Monday.
“Our whole economy has been affected by variations in confidence. Central banks are sort of trusted, but the actions they have often affect people’s confidence by appearance rather than substance. We’re not in the most trusting mood now,” Shiller said.