Volume is one of the key indicators that apply to almost any chart pattern. It is an indicator that gives an insight into the internal health of the developing pattern or to the power of a break out. Volume is the amount of shares or contracts traded during a particular trading day. Some stocks and futures contracts are thinly or very lightly traded. This means they do not have much action day to day, or are not widely followed by many investors or traders. This can be related to many factors, but more times that not, it is best to invest and trade equities or futures contracts that provide enough volume and liquidity to allow easy entry and exit from positions.
In this example of Goldman Sachs, a triangle pattern was formed. This is an example of one of the many continuation patterns that will be covered later. As this triangle pattern was forming, volume was light as the battle between buyers and sellers was waging to see who was going to win. As this pattern formed, the daily range of the stock was getting smaller and smaller, and the volume became less and less. This is like the compressing a spring, and this spring was released on larger than average volume when Goldman Sachs broke the upper downtrend line of the triangle. The greater the volume on the break out day, the stronger or more energy the break out will hold.
A breakout can happen for numerous reasons, but the best way to tell the strength of a breakout is to look at the volume on the day it happens. How to approach and trade breakouts will be covered in a later post, but the point here is that volume is a validation of price action of any security. In a breakout on two times average volume is much healthier than a breakout on light volume. It doesn't mean that its going to keep going for sure, but it helps put the odds in your favor.
Apple and Chindex experienced strong volume surges when breaking out. In these examples, both went on to establish some strong gains. The catalyst was not the volume in itself, but other fundamental reasons. Volume was just the sign that things were changing and better days were ahead.