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Volume

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Volume is : the indication of supply and demand. It’s defined as the number of units traded during a time period. This number is significant in that it supports the prevailing price trend.

Volume should expand in the direction of a major trend.  If the trend is up, the volume should increase as buying pressure exceeds selling pressure.  As prices are accepted and level off, there will also be a levelling in volume.  The same would be true if prices fall.  Volume will expand, representing a major change in the trend.

Example :
The following chart shows Merck and its volume.

Prices peaked at the end 1991 following a long rally. This was followed by a price decline (trendline “A1”). Notice how volume was relatively high during this price decline (trendline “A2”). The increase in volume during the price decline showed that many investors would sell when prices declined. This was bearish.

Prices then tried to rally (trendline “B1”). However, volume decreased dramatically (trendline “B2”) during this rally. This showed that investors were not willing to buy, even when prices were rising. This too, was bearish.

This pattern continued throughout the decline in 1992 and 1993. When prices rallied, they did so on decreased volume. When prices declined, they did so on increased volume. This showed, again and again, that the bears were in control and that prices would continue to fall.

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