This is probably the toughest blow traders receive, missing when huge stock moves appear or entering trade too late. Such missed opportunities or improperly timed trades generate frustration, losses, and feelings of defeat. The inability to time entry trades in anticipation of massive explosive stock moves has left most people hopeless, either staying strictly on the sidelines or chasing stocks at wrong times, only to see their profits disappear.
But better traders—including even those at prop shops—have the expertise to predict it for you. One of the best methods is through volume bar analysis—an extremely powerful tool that measures interest and momentum within a stock. Knowing how volume interacts with price allows you to determine the dramatic inflection points where stocks will break out or reverse before it happens.
In this article, we’ll explore the ways in which you can enter a trade before an explosive move with high accuracy through mastering volume analysis and key inflection points. Combining these techniques helps traders enhance their timing while taking advantage of volatility and maximizing every trade’s potential.
Understanding Volume: Fuel for Stock Movements
Volume is a measure of how many shares have been traded in a stock over a period of time. It is the “fuel” that powers a stock’s price action. In the absence of volume, there is no momentum; and in the absence of momentum, price goes nowhere. To see volume as the lifeblood of the stock market—it’s what lets price move meaningfully.
Why Is Volume Important?
Volume gives critical information on the level of interest in a stock at any price and point in time. The more a stock moves with significant volume, the more interest both traders and investors have in the move, which improves the chances of continued movement. A stock that has moved on low volume lacks conviction and an increased probability of reversing.
Knowing how to read volume bars on a chart allows you to identify high-probability entry points before a stock makes that explosive move. Volume does not determine whether the move is up or down, but it does give you an indication of whether the stock had enough “fuel” to maintain the movement.
Important Components of Volume Analysis for Trading
Breakouts and Capitulations
There are two big setups you should trade when using volume for trading: Breakouts and Capitulations.
- Breakouts: When a stock breaks out beyond a key price level, usually associated with higher volume, that kind of breakout would then propel the stock to keep on moving in that direction. Breakouts often happen after some periods of consolidation wherein price action has been relatively stagnant and without clear direction, and traders need something spectacular to jump in.
- Capitulations: This occurs when a stock has finally gotten exhausted after a long trend (either up or down) and fails to continue in its direction. Capitulation is the end of a trend, usually a sharp reversal with high volume as those fleeing their positions are trying to get out.
Both scenarios exhibit a rise in volume, but the nature of the move is different. Whether you are trading breakouts or capitulations, you can most certainly leverage anomalous volume activity to better predict the next move.
How to Enter a Trade Before an Explosive Move Using Volume
Step 1: Identify Key Inflection Points
This first requires that one recognize significant price levels where a stock will most likely inflect—they are inflections to break out or reverse at previous highs and lows, in support and resistance zones, and in areas of consolidation.
Inflection points are the price levels where stocks are most prone to move with heightened volatility. From this point, you can begin to pay attention to volume to anticipate when the breakout or reversal will take place.
Step 2: Determine Volume Before the Inflection Point
Volume before and at the inflection point is equally important as that at a breakout. Low volume during the consolidation process or as it approaches some key level points to indecision in the market. An explosion of volume as the price approaches the inflection point shows that traders are lining up for a move.
For example, if the volume is relatively low on a stock approaching a resistance level, then shows a significant pickup in volume when it touches that level, this is typically an indication of a pending breakout. Likewise, a stock exhausting large volume at support levels may well signal capitulation, hence an impending reversal.
Step 3: Identify Large Volume Bars
Large volume bars are really going to stand out on a chart and indicate that there is a huge interest in the stock. Whether you’re looking at daily, hourly, or intraday charts, on large volume bars say two standard deviations above the average, be alert. Large bars, particularly when they occur at significant price points, would indicate that something major was about to break out.
Case Study: Nvidia’s 500-Level Breakout
For instance, at Nvidia’s breakout at the 500-level before the adjustment of the split stock, the massive volume jumps in the price level indicated that there was massive interest in selling at that price level.
They were two standard deviations above the norm—a key signal that a big move was building. After Nvidia finally broke through this level it did so on even greater volume, confirming the breakout and allowing traders who entered early to profit handsomely from the move.
Step 4: Timing is Everything – Time Your Entry for Maximum Follow-Through
Now that you have identified a potential breakout or capitulation and confirmed it with volume the next step is executing your trade. Timing is everything. For a breakout, you can wait for the price to break above the key level on very high volume and then enter into the trade. For a capitulation, watch for exhaustion signs—the inability to print higher highs or lower lows in the trend—which combine with huge volume and trigger a short or exit.
Combining volume with price action will help increase the probability of your catch at the right time, so that you can capitalize on better follow-through on your trades.
Conclusion
The volume dynamics of the market are what you have to understand and how they relate to price in order to accurately predict an explosive movement in trading. Through volume bar analysis, the trader is able to spot where key inflection points are happening, when a breakout or a capitulation is going to happen, and he will enter his trades with absolute confidence. It’s just this simple yet somewhat powerful technique for beginners and for more seasoned traders that brings a huge edge into their trading strategy.
Being able to enter a trade ahead of an explosive move will ensure you avoid the few common pitfalls—most notably buying into failed breakouts or chasing trends too late—but also gives the ability to capture tremendous volatility and more consistent returns. Next time you’re analyzing a chart, therefore, make volume your priority—it just may be that missing link for your next big trade.