Level 1 Reading charts · Part 5/7
Volume: the Second Opinion on Price
Price tells you where it went. Volume tells you how many were involved. Together they say considerably more than price alone – as long as you know what the measured volume actually covers.
Volume at breakouts
The most reliable application is confirming a breakout. If price leaves a range on clearly elevated volume, many participants are carrying the move. If the same happens on average or low volume, the move is thin – it may still run, but it is less well supported.
The reference matters: “high” means high relative to the last twenty periods of the same instrument. Absolute volume figures are not comparable across instruments.
Typical patterns
- Rising prices, rising volume: the move is broadly carried.
- Rising prices, falling volume: the advance is losing participation. Not a sell signal, but a sign the move is narrowing.
- A volume spike after a long trend: often exhaustion or capitulation – the point where the last participants give up. Reliably identifiable only in hindsight.
- A volume spike with a long wick: a price area was tested with heavy participation and rejected. That is the most informative combination in this chapter.
Where volume does not work
Volume is only meaningful where it is centrally recorded, which is far from universal:
- Foreign exchange. There is no central exchange. What platforms display as volume is their own volume or a tick count – a slice of unknown size, not market volume.
- Fragmented equity markets. Part of the flow runs through alternative venues; a single exchange’s volume does not show the whole market.
- Crypto. Exchange volume is real, but every venue counts separately and reporting quality varies enormously.
Where volume is incomplete, one substitute remains: the range of the candle. Large ranges come with high activity, small ones with low – a coarser but universally available indicator. That is exactly what average true range is built on.
Volume and ETFs
A special case with practical consequences: for an ETF, low trading volume is not a warning sign about the fund. Its price is determined by the value of the securities it holds, and authorised participants can create new shares at any time. Low volume mainly means a wider bid-ask spread – a cost question when buying, not a verdict on the product.
Next
That completes the building blocks of chart reading. The next article covers the arithmetic that comes before any pattern: how much a single position may cost you.