Volume spikes (not to be confused with price spikes) are most common at the beginning of a trend and at the end of a trend. The beginning of a trend often arises out of a pattern with a breakout, and the end of a trend often occurs on a speculative or panic climax. Higher-than-usual volume tends to occur with each event. By screening for volume, the trader can often find issues that are either ready to reverse or that have already reversed. The usual method of screening for a volume spike is to compare daily volume to a moving average. The trader can look for volume that is either a number of standard deviations from the average volume or a particular percentage deviation from the average. As for interpretation of the spike when it occurs, it is often difficult to determine which variety of spike has occurred until after the spike peaks and you observe the subsequent price action.
Usually there is a reason for a volume spike, but the reason for the spike may be unrelated to the technical issues of price trends and behavior. Of course, heavy trading may be related to a news announcement made about the company. Or, heavy trading volume in a stock can occur if the stock is a component of an index or basket that had a large institutional trade that day.
Options expiring can also influence volume figures. In all spikes, any outside reason must first be investigated because it may have nothing to do with the issue’s trend and price behaviour.
Volume Spike on Breakout
Breakouts are usually obvious. High volume on a gap or on a breakout from a pre-existing chart pattern is usually the sign of a valid breakout. Although breakouts do not necessarily require high volume, many analysts use a spike in volume as a confirmation of the breakout and ignore those without a volume spike.
Volume Spike and Climax
A climax usually marks the end of a trend and either a subsequent reversal or consolidation. Climaxes come in many forms, however, and are not always identifiable except in retrospect. Generally, climaxes occur with one of the short-term reversal patterns. These typically can be price spikes or poles, one- or two-bar reversals, exhaustion gaps, key reversals, or any of the other short-term reversal patterns.