High trading volumes may indicate an approaching price reversal

A sharp spike in trading volume, more than twice the average of the past three months, can be a clear sign that a major price move is reaching its limits. That is what analyst TheBirbNest claims in an analysis on X, in which he explains when extreme volume is reason to consider exiting rather than entering.

In short:

• A volume spike of more than 2x the average can indicate exhaustion of a price move.
• Volume often builds up over two to three sessions before a real top or bottom becomes visible.
• In extreme volumes, you always combine that information with the context of the price move.

Volume as a sign of exhaustion

Volume spikes regularly appear around tops and bottoms in the market. The reasoning behind this is that at a certain point one of the sides, buyers or sellers, has deployed everything it had. As a result, there are simply too few parties left to push the price further in the same direction.

TheBirbNest says that you should not focus on a single candle on the chart here. Volume can build up over two to three trading sessions before the actual peak becomes visible. So it is about the sequence of bars, not just the largest one.

Context determines the meaning

The analyst notes that context is crucial with extreme volumes. When a market has already travelled a considerable distance and volume shoots up at the same time, that is a warning sign that the move is losing momentum. Extreme volume combined with an already stretched price move is, according to him, a situation in which you should ask yourself whether the time has come to take profits instead of opening a new position.

The image accompanying the analysis shows a candlestick chart in which volume spikes are visible at moments when the price makes a clear turn. Both at tops and bottoms, the pink and green volume bars are noticeably larger than in the calm periods before and after, which visually supports the pattern TheBirbNest describes.