Chart Analysis · Lesson 9 · Advanced
Reading Volume: Confirmation, Divergence and False Breakouts
You use volume as confirmation of trends and breakouts and spot fakeouts by the lack of volume.
With a free account: interactive chart exercises, quizzes with answers, progress and XP.
Volume confirms the price
Murphy's hierarchy: price is the most important thing, volume is secondary and confirming. Volume should expand in the direction of the trend, so in an uptrend it should be heavier on rising prices.
Deciding breakout or fakeout
Interactive exercise: here you learn right on the chart, with feedback on every click. Sign up freeto start it.
Breakout or fakeout
The resolution of every chart pattern needs heavier volume, otherwise it is a fakeout. Goodman shows this on Cardano at the end of 2023, volume doubled at the real awakening of the trend.
Which breakout holds?
Interactive exercise: here you learn right on the chart, with feedback on every click. Sign up freeto start it.
The key points at a glance
- Price is primary, volume confirms and should expand in the direction of the trend.
- A breakout without a rise in volume is usually a fakeout.
- Volume spikes mark bottoms (panic) more often than tops, which form quietly.
Deep dive
OBV: condensing volume into a readable line
Granville's On Balance Volume condenses raw volume bars: if the day closes higher, the day's volume is added, if it closes lower, it is subtracted. Only the direction of the line matters, not its absolute value.
- A new price high with a lower OBV high is a bearish divergence
- Volume precedes price: pressure often shows up first in volume
- OBV is an early-warning system, not a trade trigger
Spotting a bull trap: easy up, hard down
The classic bull trap has a telltale signature: the final breakout above an old high happens on light volume, then price falls back on heavy volume. It is especially common in crypto because stop hunts over old highs collect liquidity.
- Every genuine resolution needs heavier volume, otherwise it is a fakeout
- Breakout on weak volume: do not chase it, wait for the retest
- Bulkowski measures breakout volume against the 30-day average
- U-shaped volume performs best, directionless volume performs worst
Blowoff and selling climax: the spike marks the end
A blowoff top is a nearly vertical price surge on very high volume with an abrupt reversal: the last buyers are in. Its mirror image at the bottom is the selling climax, a sharp drop on heavy volume with a fast rebound. You can follow this on the demo exchange with a volume panel.
- Volume spikes mark bottoms more often than tops
- A market falls from inertia, but never rises from inertia
- Tops form quietly, bottoms need a visible panic sell-off
Sources: Murphy, Elder, Goodman, Burniske
Make this lesson interactive
Sign up for free and learn with click exercises right on the chart, quizzes with explanations and saved progress. Then you practice everything risk free on the demo exchange.
100% free, no payment details.