How to Read a Stock Chart's Volume
In the world of short-term stock trading (such as day and swing trading and stock options) stock charts are an essential tool. That's because in the short run, trends in trading and price are often most important, even if a company's long-term success depends on more fundamental factors like management, revenue growth and earnings. A good stock chart provides far more information than just a graph of stock prices, including a record of trading volume. Knowing where to look on a stock chart for volume data is only part of the story. To really read a stock chart's volume, you must learn to relate this information to the other items on a stock chart.
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Instructions
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Have a sample chart to look at while following these steps. Check in Resources for a link to Stockcharts.com.
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Read the stock chart's volume for the day the stock chart was made. The day's volume is listed at the top of the chart along with the date, stock symbol, and the day's high, low and closing prices. One other item you'll see is the moving average, listed as MA(30), MA(60) or another number followed by a price. This is the average price the stock has traded at over the previous 30, 60 or however many days are listed in parentheses.
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Look in the center of the chart where the graph of the stock price changes is located. You'll notice that the price graph is composed of bars (also called candlesticks). Don't mistake these for volume indicators. The top of each bar tells you the high for that day's trading, while the bottom tells you the low. The direction of the price graph indicates whether the stock is in an upward or downward trend. If it's not moving in any particular direction, it's in a period of consolidation.
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Find the record of trading volume for the period covered by the stock chart at the bottom. This is presented as a bar chart. At the left is a scale that you see to determine how many shares were traded on a given day, depending on the height of the bar.
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Interpret the significance of the volume of shares traded. Volume indicates more than just how many shares were traded. Changes in the volume signal that investors may be selling a lot of the stock (or buying), creating pressure on the stock price. For example, if a stock's price has been stable (in consolidation) but trading volume is starting to rise, that's a strong indication the price is about to start moving up or down, and the savvy trader will watch closely to see which way the trend will be watchful.
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