Volume Analysis: Meaning, Calculation, and How to Use It

Key takeaways
* Volume analysis examines how many shares or contracts trade in a given period and helps confirm price moves.
* Rising prices on increasing volume suggest a strong bullish trend; falling prices on increasing volume suggest a strengthening bearish trend.
* Two common volume-based indicators are the Positive Volume Index (PVI) and the Negative Volume Index (NVI), which separate price action driven by higher-than-usual volume from action on lower-than-usual volume.

What is volume analysis?
Volume analysis studies the number of units (shares, contracts) traded over a period to assess the conviction behind price movements. Technical analysts use volume together with price charts to determine whether a price change is backed by broad participation (higher volume) or is more likely noise (lower volume).

Why volume matters
* Confirmation: Price moves accompanied by higher volume are generally more reliable.
* Strength measurement: Increasing volume in the direction of the trend signals strength; decreasing volume can signal weakening momentum or an exhaustion move.
* Reversals: Spikes in volume at key support or resistance levels can mark the start of a reversal.

How to read volume with price
* Bullish confirmation: Price rises + increasing volume = likely continuation.
* Bearish confirmation: Price falls + increasing volume = downward trend gaining strength.
* Divergence: Price moves without corresponding volume support (e.g., price rising on falling volume) can warn of a potential reversal or weak rally.
* Use volume bars beneath candlestick or bar charts, and consider smoothing with a moving average to spot trends.

Volume indicators: PVI and NVI
Two classic indices that incorporate volume are the Positive Volume Index (PVI) and the Negative Volume Index (NVI). They isolate days of rising volume (PVI) and falling volume (NVI) to show how price changes relate to volume direction.

Rules
* PVI is updated only on days when current volume > previous day’s volume. On other days PVI is unchanged.
* NVI is updated only on days when current volume < previous day’s volume. On other days NVI is unchanged.

Formulas (use when the respective volume condition is met)
* PVI_today = PVI_previous + [(CP_today − CP_yesterday) / CP_yesterday] * PVI_previous
* NVI_today = NVI_previous + [(CP_today − CP_yesterday) / CP_yesterday] * NVI_previous

Where:
* PVI_previous / NVI_previous = the prior index value
* CP_today = today’s closing price
* CP_yesterday = yesterday’s closing price

Initialization and interpretation
* These indices are typically started at a base value (commonly 100 or 1000) and then updated cumulatively.
* An increasing PVI indicates price changes are occurring mainly on higher-volume days; many interpret PVI activity as reflecting wider retail or “noise” participation.
* An increasing NVI indicates price changes are occurring mainly on lower-volume days; some traders watch NVI for signs of professional or smart-money activity since professionals may trade on lower-volume days.

Simple example
* If PVI_previous = 1000, CP_yesterday = 100, CP_today = 110, and today’s volume > yesterday’s:
* Percent price change = (110 − 100) / 100 = 0.10 (10%)
* PVI_today = 1000 + 0.10 * 1000 = 1100

Practical tips for traders
* Always combine volume analysis with price action, trendlines, support/resistance, and other indicators—volume alone is rarely sufficient.
* Use moving averages of volume to filter out day-to-day noise.
* Watch for volume spikes on breakout attempts; strong breakouts usually come with above-average volume.
* Compare a security’s volume to its historical average and to broader market volume to assess relative strength.

Conclusion
Volume analysis provides context to price movements and improves the reliability of technical signals. Indicators like PVI and NVI help separate price changes that occur on higher-volume days from those on lower-volume days, offering additional insight into market participation and the potential durability of trends.