In the previous post, we discussed the Types of Price Charts. This week's post, we will focus on volume and open interest that technical analysts track.
Volume and open interest
In addition to price, the other two variables that technical analysts monitor are volume and open interest. Volume research extends to all markets, and open interest extends mainly to derivatives and exchange-traded securities. It should be remembered that volume and open interest are secondary technical indicators to price.
Definitions: Volume is the number of entities traded during a single study period. Open interest is similar and corresponds to the total outstanding contracts for the period in question.
If both volume and open interest are rising, then the prevailing price pattern is likely to continue. It can be seen as a warning that the current trend might be approaching an end if the data declines.
Other volume interpretations
Confirming trend analysis or detracting from trend analysis
The volume level tests the size of a consumer trend. The analyst can calculate the buying or selling pressure behind a trend and be used as confirmation of, or deviation from, a market change by measuring volume following price movements.
Volume precedes price
This means that prices are still moving in one direction, but volume is already increasing or decreasing as an early indicator.
A proportional volume increase usually confirms a market breakout
A sideways or range trading market can initiate a sharp change beyond the usual range parameters. The analyst sees evidence of the breakout in an uptick in price, suggesting that there are substance and buying/selling pressure behind the move with an increased probability of more directional changes.
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