In technical analysis, it is important to look at a number of sources of information when evaluating any potential trade set up. If you are thinking of placing a new spread bet, you should look at volume as well as price action. Volume is simply the number of lots of that instrument that were traded on its exchange during that time period. So on a daily chart our volume bars represent the number of shares traded each day on that stock exchange. Volume analysis can sometimes give you an insight into the conviction of any particular move and it proves very useful in improving your betting accuracy in a number of contexts.
Trends
If you are trading a trend following style, then volume can help you to see the strength of that trend. A strong trend will have a series of higher swing highs and higher swing lows. As price moves in the direction of the trend it should do so on high and increasing volume. Any retracements should be on lower volume than the main trend.
This sort of analysis will help you to filter out trends that lack conviction. If your trend does not exhibit this behaviour, then price is more likely to be drifting and your trades are more likely to fail.
Blowouts
When a trend reaches the end point of its move, you may see a large volume spike. These volume spikes are known as blowouts, and they can often signal an imminent reversal. Blowout volume spikes often feature particularly long bars where price has moved a long way.
If you are trading a trend following strategy and the extreme end of that trend features a large candle with much higher volume than other recent bars, then you may be looking at a blowout. If so, the trend is likely to be over in the short term and may even reverse soon. Your chances of success with another trend following bet are therefore lower.
Breakouts
If your trading strategy involves breakouts through resistance, then volume analysis is again a critical factor in your success. What you want to see when you are trading a breakout is an increasing volume as price approaches the level of resistance. You want to see the bar that breaks out through that resistance also have high volume. This is a sign that there is real conviction in that movement.
If on the other hand you are seeing weak volume as price moves up to the breakout level and/or price breaks through the resistance on low volume, then any potential bet here is more likely to fail. The breakout lacks conviction and you will improve your win/loss ratio by avoiding such trades.
Conclusion
Like many of the techniques in technical analysis, volume analysis is just one piece of the puzzle. In isolation volume tells us little, but when you start to build up a picture of price action, support/resistance, volume analysis, candlestick patterns and indicators then you start to unearth any potential hidden bias in the market. Use these tools together to formulate your trading strategy and increase your profits.