What Part Does Volume Play In Trading Stocks?

Volume is the gas that powers stocks higher. It is caused by large financial institutions, like insurance companies, mutual funds, brokerage firms and other large entities taking positions in a stock. Unlike the typical trader, institutional investors buy huge blocks of a stock, and their presence shows up as increased volume.

Volume plays a particularly important role when a stock is setting up in any one of a number of chart patterns that signify the stock is preparing to make a big move, because on the day a stock “breaks out” of one of these patterns, the volume is noticeably higher than on an average day. It is not uncommon for a breakout stock to amass two, three, or four or more times the volume it would rack up on an average day.

Without strong volume, a stock’s breakout is suspect. With strong volume, a stock’s breakout is confirmed, and it is not just noticeable at the end of a trading day. A stock that is moving explosively beyond a well-defined price resistance area on a chart will often pace well above its average volume at the very start of the day.