Forex Trading

A Financial Analyst’s Guide to Trading the Volume Indicator

what is trading volume

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Comparing volume today to volume 50 years ago might provide irrelevant data. For example, imagine volume increases on a price decline and then the price moves higher, followed by a move back lower.

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Little change in volume or declining volume on a breakout indicates a lack of interest and a higher probability for a false breakout. Chase’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you’re about to visit. Please review its terms, privacy and security policies to see how they apply to you. Chase isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the Chase name. The OBV line tracks the cumulative volume, with each day’s volume either added or subtracted, depending on whether the closing price is higher or lower than the previous day. It is all about the direction of price movement compared to the increases or decreases in volume.

  1. For example, a rising stock should bring increasing volumes, indicating a strong bullish conviction.
  2. However, it’s important to use them in conjunction with other technical indicators and fundamental analysis to avoid false signals and potential losses.
  3. PipPenguin and its staff, executives, and affiliates disclaim liability for any loss or damage from using the site or its information.
  4. If the closing price is closer to the high, it indicates accumulation or buying pressure.


High volumes can indicate bullish or bearish sentiments and the level of investor conviction regarding a particular stock. Volume is the number of shares of a stock that have changed hands over a certain period of time, typically one day. Stocks with higher volumes have more investors interested in buying or selling them. In recent times, high-frequency traders and index funds have become a major contributor to trading volume statistics in U.S. markets.

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For instance, a stock’s trading volume refers to the number of shares traded between its daily open and close. Trading volume, and changes in volume over the course of time, are important inputs for technical traders. In conclusion, understanding and analysing trading volume is of utmost importance in the financial markets. By incorporating trading volume analysis into their trading strategies, traders can potentially increase their profitability and navigate the market with greater confidence.

How important is the volume in stock?

The versatile nature of trade volume is applicable across various financial instruments and instrumental in shaping investment strategies. At its core, trade volume serves as a key technical indicator, offering a comprehensive reflection of the overall market activity for a specific security. Investors leverage this metric to gain insights into prevailing trends, identify potential reversals, and assess the momentum of a given market. Low volume in stocks indicates little interest from traders and investors.

It’s not very complicated, so don’t over complicate it, as is often the case in trading. Most traders find it useful to add a simple moving average to the volume indicator to easily spot higher than average volume as seen below. For example, every volume bar on the daily chart seen below represents the total volume traded for that day. There’s countless tools and indicators for you to learn as you dive deeper into volume, but they all require an understanding of basic volume analysis.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.

what is trading volume

Similarly, significant volume spikes can signal potential trend reversals, indicating a shift in market sentiment. The content on this site encompasses general news, our analyses, opinions, and material from third-party sources, all designed for educational and research aims. It is not meant as direct advice or a prompt to undertake any specific action, including investments or purchases. Before making financial decisions, we urge you to conduct thorough research, exercise personal judgment, and consult with professionals.

Now that you have a basic understand of how volume is calculated, let’s look at how you can use volume to improve your trading. For example, if you buy 100 shares of TSLA from a seller, the total volume for that transaction is 100. All rights are reserved, including those for text and data mining, AI training, and similar technologies. For all open access content, the Creative Commons licensing terms apply. This website is using a security service to protect itself from online attacks.

Measuring trade volume stands as a cornerstone for investors seeking a deep understanding of market dynamics. The vertical volume indicator is important for traders to gauge the strength or weakness of a given stock. On TradingView, it is one of the standard indicators used to assess supply and demand in a market. Capitulation is a dramatic surge of buying pressure in a rising market or selling pressure in a declining market. As the move accelerates, it will reach a point where traders unwilling to suffer further losses snowballs, leading to a surge in price as traders make a mass surrender.

This is the second biggest volume surge of the year for Netflix and is significant. A blow-off top can indicate overbought market conditions and a potential sell opportunity. You can use volume not only to confirm a trend but to assist in your trade management as well. Once price broke through $10.00, new participants failed to enter the market as represented by the declining/flat volume. Instead, it makes more sense to look at volume as part of the big picture when evaluating a particular stock.

Trading volume is calculated by simply taking the number of shares or contracts exchanged between a buyer and seller in a single transaction. Whereas, when trading derivatives such as index futures, volume will be expressed in contracts. When considering volume while evaluating a particular stock, investors might want to assess how difficult it could be to dispose of their shares if they decide to sell. It’s best to do your research to determine your preferred volume or consult a trading or investing professional. On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move.

But you can easily find stocks, commodity futures, and even currency pairs that often move sharply with low trading volume. For instance, assets like corn, wheat futures, and some penny stocks are less likely to experience sudden price swings, making them suitable for range-bound trading strategies. Still, some forex trading platforms, such as TradingView and MetaTrader 4 and 5, do display volume data.

Investors often rely on this metric to validate the authenticity of a trend, providing a foundation for confident decision-making. As an illustration, consider a situation where a UK stock, ABC Plc, is Binance cryptocurrency exchange experiencing an upward trend. A simultaneous increase in trade volume substantiates the upward momentum, instilling confidence in investors that the trend is not merely a fleeting market fluctuation.

Trading volume is usually higher when the price of a security is changing. News about a company’s financial status, products, or plans, whether positive or negative, will usually result in a temporary increase in the trade volume of its stock. takes no responsibility for loss incurred as a result of the content provided inside our Trading Academy. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets.

So, upon identifying a price reversal accompanied by an unusual increase in trading volume, you can interpret it as the end of the existing trend. For example, as you can see in the Wheat chart below, the price was trending down for a while but with a low trading volume. Then, once the price has reached resistance at a certain level with significantly high trading volume, the reversal is likely to occur.

We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. helps traders of all levels learn how to trade the financial markets. In this article, we will dive deep into everything you need to know about volume trading, from the popular types of volume indicators to how to trade different market conditions. Volume-by-timeframe is used to display the trading volume of a security over a specific time period. This is because the volume reflects how many shares of stock were bought and sold during a certain period and not the total value of those trades.

By understanding the importance of trading volume and how to analyse it, traders can make more informed trading decisions and improve their chances of success in the market. It is essential to consider multiple factors and indicators to create a comprehensive trading strategy. Additionally, temporal patterns extend beyond daily occurrences, manifesting in a weekly rhythm. The start and end of the trading week witness increased trading volumes as investors position themselves for the week ahead or make adjustments based on the week’s performance. This temporal ebb and flow provide a unique lens through which investors can interpret market sentiment and anticipate potential shifts in activity. Trading volume measures the total number of shares or contracts traded for a security within a specified time.

That’s because traders are responding to the news by either buying or selling the company’s shares. For example, suppose company ABC extended its uptrend for another five months and increased by 70% in six months. The investor sees that share prices of company ABC are still in an uptrend and continues to hold on to the shares. This could signal to the investor that the bullish uptrend in ABC stock is beginning to lose momentum and may soon end.

Those who learn how to use volume in trading certainly have the ability to identify many trading opportunities. Another way to use volume in trading is to identify abnormal trading volume. These are known as volume spikes, which are abrupt and substantial increases in trading activity. These spikes can occur for various reasons, such as significant news events or economic releases.

On average, in 2022, 50 billion stocks were traded monthly, and the total number of shares traded was over 650 billion for the S&P 500 index. During stock market volatility, for example, in 2008, the volume of stocks traded topped 1.3 trillion for the year. We analyze volume to confirm breakouts, continuation of trends, and trend reversals. Shortly, we will look at some real examples, but first you have to understand the story that volume tells you.

Tick indicators display the total number of transactions over a specified time frame, appearing as bars on a graph beneath price charts. When the current period’s volume exceeds that of the previous period, the bar appears green, indicating increased activity. On the other hand, a red bar signifies decreasing volume compared to the previous period. When the closing price is closer to the high, it suggests accumulation, indicating buying pressure. On the contrary, when it’s closer to the low, it signifies distribution and selling pressure. So, a gradual increase in trading volume over several trading sessions may indicate growing interest in a particular asset.

2009 is committed to honest, unbiased investing education to help you become an independent investor. We develop high-quality free & premium stock market training courses & have published multiple books. We also thoroughly test and recommend the best investment research software. First on the list is volume profiles, which are at the core of most of my trading strategies.

A/D determines whether the currency pair is experiencing accumulation (buying) or distribution (selling) by comparing the currency pair’s closing price to the price bar’s range. It is the metric that quantifies the number of units or shares of an asset that have changed hands during a specified timeframe. To read volume in a stock chart, you need to evaluate the stock price trend, look for spikes in volume, and then see if the price trend has changed after the volume spike. The blow-off top is often seen near the end of a long-term uptrend and can be used by traders to indicate that a market may be about to reverse its trend. Traders must be cautious when trading around such events, as the price may continue to drop sharply.

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