It's one of the most frustrating things in trading: you see a stock soar past resistance, you jump in, and then... poof. The move completely reverses, leaving you wondering if you just fell for a classic market "head fake."

How to Use Volume to Confirm a Real Breakout or Avoid a Fake One?

In this deep dive, we reveal the market's "truth serum." You'll learn that while price tells you what happened, volume reveals the conviction behind it. Think of price as the car and volume as its engine—without a powerful engine, that car isn't going anywhere for long.

We'll give you a concrete benchmark to use—the 50% above average daily volume rule—and break down the five critical volume patterns you must know. This includes how to spot a "bull trap" or "bear trap" before it springs, and what a "volume climax" signals about the end of a trend. We also touch on simple tools like the Average Daily Volume (ADV) line and more advanced ones like On-Balance Volume (OBV) and Relative Volume (RVOL).

For options traders, this analysis isn't just helpful—it's critical.

After listening, what's the first thing you'll look for on the volume chart?

Key Takeaways

• Volume is Conviction: Price is what happened, but volume is the "engine" that reveals how strong the move truly is. High volume signals broad participation and commitment; low volume signals fragility and a potential "fake out."
• The 50% Rule: A solid rule of thumb for a confirmed breakout or breakdown is to look for volume that is at least 50% higher than the stock's Average Daily Volume (ADV).
• The 5 Critical Patterns:
  1. Breakout + High Volume: A strong, confirmed signal.
  2. Breakout + Low Volume: A "Bull Trap." A major warning sign to stay away.
  3. Breakdown + High Volume: A strong, confirmed bearish signal.
  4. Breakdown + Low Volume: A "Bear Trap." A fake-out designed to trap sellers.
  5. Volume Climax: A massive, record-breaking volume spike after a long trend, often signaling exhaustion and a potential reversal.
• Nuances Matter: Analysis is more than just bar height. You must also consider relative volume (vs. ADV), trend context (is it at the start or end of a move?), time of day (open/close vs. lunch lull), and follow-throughon subsequent days.
• Essential for Options Traders: Due to leverage and time decay (theta), options traders cannot afford to be wrong about a move's conviction. A low-volume, failed breakout can wipe out an option's value much faster than the stock.

"If price is the car, then volume is its engine... without a powerful engine, that car isn't going anywhere fast or certainly not for long."

Timestamped Summary

• (00:52) Why Volume is the "Engine" of Conviction
• (06:34) The 50% Rule: How to Define "Significant" Volume
• (08:21) 4 Nuances: Relative Volume, Trend Context, Time of Day, Follow-Through
• (11:46) The 5 Critical Volume Patterns (Bull Traps, Bear Traps, Climax)
• (18:13) Why This is Non-Negotiable for Options Traders

Did this episode help you spot a "fake out"? Leave us a 5-star review on Apple Podcasts! Know a trader who keeps getting caught in bull traps? Share this episode with them!

What's your biggest takeaway on volume analysis? Join the conversation in our free community!

Support the show