Dow Theory – The trend is confirmed by volume!

Dow Theory is the underlying theory of the market upon which all technical analysis is built. Previously, we analysed such important aspects of this theory, as The trend has three phases and The Price disccount all the news. After these theories, you should pay attention to such a statement, as “the trend is confirmed by volume”.

Market volume

First it is worth indetify the volume on the market or trading volume. The volume on the market is a relative indicator showing the total value of purchases and sales, showing the approximate value of trading volumes. Trading volumes do not show the specific number of buy and sell transactions. The volume is an actual indicator of activity on the market, which reflects a specific movement on the market and can serve as both an indicator confirming the trend and indicating its reversal, not to mention an explicit display of activity in the market.

At the same time, it is worth noting that with a high volume activity in the market a clear trend is being formed and can be seen. With low trading volumes, trend activity will slow down or forming a flat, lateral movement will be formed.

The trend is confirmed by volume

The essence of the statement is that changes in the trend in the market should be confirmed by a significant amount. That is, price fluctuations at low trading volumes are likely to be false. Because it doesn’t have a sufficient reason.

The theory of volume built on the statement “the trend is confirmed by volume” nowadays occupies a very significant place in technical analysis and has many different statements and rules. All of them are still reduced to one thing: the trend is confirmed by volume.

Thus, in most cases, a new trend or trend reversal will be false if the volume does not confirm this movement.

For example,  a reversal of the downtrend for the EUR/USD pair is confirmed by the increase in volume on the daily timeframe. At the same time, a decrease in the volume of October 29-31 with a downtrend indicated that the movement was false.

On the other hand, a decrease in volume on November 2, while maintaining an uptrend, indicates a slowdown in the uptrend, which, against the background of a decrease in volume, can serve as a signal for slowing growth or reversal.

In the last article devoted to the Dow theory we will discuss such an important statement: The averages must confirm each other.

Anton Hanzenko