Uptrend with a bullish volume association

When put together the price / volume relationship is part of the jigsaw that creates a powerful trading tool.

The price and volume relationship form the basis of Dow theory and economics 101 and reflects the demand / supply balance of the demand of a stock. This relationship is fundamental to chart analysis. Events can change and that’s a reality and this is where some analysts err in their expectations of the use and benefits of price analysis. We must be responsive and respectful of the money flows presented to us on a price and volume chart. Nothing is forever.

Price

Price is the raw data of traded prices for a period and is displayed in varying constructions and periods. The majority of chart data include closing prices displayed as a line graph or open, high, low, close as a bar or candlestick. There are other more varied types and the periods can vary from monthly charts right down to minute charts for the short-term trader. The charts here are displayed as weekly candlestick charts

Volume

Volume data displays the amount of buying and selling for any period. This traditional depiction can be in number of shares traded or in dollar terms. Volume is generally displayed as a histogram below the chart (as above). It can also be displayed as an oscillator around an average or a combination of volume averages. On balance volume is also an oft used format and is calculated by adding volume during up periods and subtracting volume on down periods. This is drawn under the price chart and is another way of showing the price and volume relationship to confirm price strength or weakness.

Price and volume

When the price moves higher and volume increases the price trend is considered validated or sound. If the price moves higher and volume contracts the price trend rise is considered to be weak. On the stock market we are always looking for volume to increase with price and that leads us to an expectation prices will continue to rise. The chart above reflects that relationship and outcome as the price keeps rising as volume expands. During the price weakness periods volume contracts and that maintains the bullish outlook as selling is not heavy during these periods.

If volume were to increase as the price falls the expectation is the price will fall further. This can be seen on the price below as prices begins to fall, volume increases and thus the price falls further. This is the standard relationship of price and volume that guides us in our analysis of stock movement and provides the basis of analysis for most price analysts.

Uptrend with a bullish volume association