Volume is defined as the number of trades or number of contracts that are transacted within a specific period of time.
For example:
- When 10,000 shares of a stock are bought and sold in one hour the volume of the hour is 10,000.
- The volume will grow in case Bitcoin is traded heavily.
Majority trading sites show the volume in a set of vertical lines at the bottom of a chart.
The bigger the bars the more the traders will trade whereas the less the traders will be interested in the smaller bars.
Why Volume Is Important
Volume enables traders to know the power behind movements of prices.
Having a high volume price move normally implies that lots of traders concur with such a move.
A low volume move might be unreliable.
Consider volume as fuel to the market.
- High volume = strong fuel
- Low volume = weak fuel
Price movements frequently run out of momentum unless they have sufficient volume.
How Volume Moves the Market
The markets drift due to demand and supply. Volume and faster moving prices occur when there are numerous traders in the market simultaneously.
These are three scenarios that volume is important.
1. Increasing Price and Large Volume.
In situations where the price is on an upward trend and the volume of the same is also on the rise, it is a general indication that the buyers are powerful.
This proves that the trend is healthy and the traders are backing the trend.
Example:
- Bitcoin passes through a resistance point.
- Volume suddenly increases
- Price continues rising
This is widely believed to be a great bullish indication.
2. Downward Moving Price and High Volume.
Large quantity sold at a reduced price indicates that there is high selling force.
This often happens during:
- Market panic
- Major news events
- Institutional selling of large scale.
A drop is characterized by high volume, which identifies that the market is controlled by the sellers.
3. Breakouts with Volume
Volume particularly plays an important role during breakouts.
Traders seek high volume confirmation when the price breaks either the support or resistance.
Why?
Since good volume indicates that a lot of traders are on the breakout, it is likely to persist.
False breakouts can occur as a result of low-volume breakouts.
Volume in Different Markets
The performance of volume varies a bit based on the market.
Stocks
Stock markets reflect real volume data since all the shares that are traded are registered.
Crypto
Crypto exchanges also display real volume of trading as all trades are recorded on exchanges.
Forex
The Forex market operates under the tick volume to assess the number of times the price is altered rather than the actual magnitude of the trade.
Although not precise, tick volume provides a good information about the market activity.
Basic Volume Trick of a Novice.
One very easy rule to most traders is:
“Price + Volume = Confirmation.”
This implies that traders seek volume to bolster the price trends prior to making a trade.
For example:
Uptrend + rising volume → stronger trend
-
Downtrend + rising volume → stronger selling pressure
-
Breakout + high volume → higher probability move
Final Thoughts
Volume is the potent tool that can assist traders to realize what is going behind the price movement.
Whereas price indicates the direction, volume indicates the strength of such a move.
To summarize:
- Large volume has a good market interest.
- Poor market participation is low volume.
- Volume validates trends and breakouts.
Trading will benefit your market analysis significantly when you learn to read volume.
Good traders do not simply sit and watch the price but they monitor the volume behind the price.
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