Volume momentum
Volume momentum refers to the rate of change in trading volume, providing insight into the strength and sustainability of a price movement. High volume during price increases or decreases suggests strong momentum and potential continuation of the trend, while low volume indicates weaker momentum and possible reversals. Traders use volume momentum to confirm trends, identify potential breakouts, and gauge market interest in an asset, making it a crucial component of technical analysis.
This is best illustrated with important economic indicators. Just before an announcement, we see volumes drop and the price begins to fluctuate nervously as traders await the result.
Notice how the volume here – the middle bar chart – drops off just as a trend reversal is about to take place.
Liquidity means how easy or hard it is to buy or sell an asset. Here, again, the more people there are trading on the asset, the higher its liquidity. Now notice, neither one of these refers to the VALUE of the asset. Both of them determine HOW an asset’s price moves, not to where. And that’s where the word MOMENTUM comes in: the STRENGTH of a trend.
Now, for those of you who remember your high school physics, momentum has both a directional aspect and a magnitude. Given a fixed direction, then, momentum equals mass times velocity. It’s the same in financial markets – the higher the mass, the volume of traders, the higher the trend’s momentum. A correlation of that is that the higher the momentum, the more power required to change it.
Notice that in our chart, we can call up both the volume and the momentum indicators. Momentum can give us an excellent indicator as to when to enter a trade – when it’s low but rising.