What is volume in trading and how does it work?

In the last installments of the trading training series we have mostly covered different types of trading indicators that make it easier for us to read the markets through the graphs. There is one of them that is one of the most important that we have to learn to interpret so that we do not miss the movements that occur in the investment markets. In today's trading training, we are going to learn what volume is in trading and how beneficial it can be for our operations.

What is volume?

Volume is the number of transactions of an asset that have changed hands during a given period of time. Assets with higher volumes have more traders interested in buying or selling them. If an asset with high trading volume is rising, it means there is buying pressure as investor demand pushes the asset to higher and higher prices. On the other hand, if the price of an asset with high trading volume is falling, it means that more investors are selling their assets. The most common time frame to talk about volume in assets is daily volume. Average daily volume is the average number of assets of the asset traded per day over a given number of days.

How does volume work in trading?

The volume can be adjusted with the remote control keys in the case of televisions. But in trading it is different, the volume helps us at all times to determine the situation of the specific asset. The volume that is most commonly used is the volume that we can see in the graphs at the bottom. Although we also have the volume profile and volume range, which allows us to visualize the areas where the most trading has arisen.


Volume is one of the pillars of our trading training. Source: Tradingview.

Mainly, we can distinguish the volume in two ways:

Low volume

Assets with low volume can tell us that they may be difficult to sell because there may be little buying interest. Additionally, assets with low volume can be quite volatile because the spread between the bid and ask price tends to be larger. Not to mention that usually assets with low volume can be easily manipulated. We can see it in the form of the figures of the active price (there are no well-defined continuous movements) and the unusual peaks of activity that are seen in the volume on its graphs.


Low volume in an asset is a first warning sign when investing in financial assets. Source: Tradingview.

High volume

Assets with high volume and rising price are usually easier to sell at an optimal price. In turn, when an asset has unusually high volume, it means that something is happening in the company that investors should know about. It could tell us that good or bad news has been published recently, but not necessarily. In our trading training, it is not always clear to us why an asset rises or falls. In the following chart, we see that during the day October 25, 2019, Bitcoin rose 16% in just one day. As you can see, the volume that day was unusually high due to rumors that China could legalize the use of cryptocurrencies.


The unusually high volume that day was caused by rumors that catapulted the price of Bitcoin. Source: Tradingview.

We can distinguish three types of high volume:
  • Stop: Climatic volume that usually coincides with a level close to the market support/resistance to stop an accelerated trend.
  • Intent: High volume piercing a relevant price level (support/resistance/guideline) considered an effort to break a level.
  • Reaction: Above average volume close to a relevant price level, where there is a high volume peak (climatic or above average) exerting counter-trend pressure where there is a level that they do not want to pass by setting limit orders .

How do we interpret volume in trading?

We can define volume as a representation of sales or purchases (differentiating them with two different colors) or directly to represent the activity that happens at key moments (with just one color). At the same time, the size of the candles that represent the volume also serves as an indication to differentiate when a movement can be decisive and when it cannot. Usually an average is applied to the volume to guide us on the development of the volume.


Interpretation of price convergence/divergence with volume. Source: Tradingview.

For example, we may encounter low volume that is not decisive in price action, volume that exceeds the average, and climatic volume that can signal decisive moments. One of the common uses that we can give to volume is to determine situations in which a reversal in the price of an asset may occur, forming resistance or support. It is important to look at the divergences and convergences that may occur between price and volume.

What does volume contribute to our trading training?

Volume is one of the pillars of our trading training, given the great importance it has on the future of an asset. Let's see what the volume gives us to be able to interpret the markets:

1. It can tell us that an asset has strength to add it to our portfolio

When an asset is rising, it indicates strength. High volume indicates a strong conviction with the direction in which the asset or market is moving. However, volume is not revealing of the reason for the market trend, so we will have to investigate to find out why the trend is occurring.


We can represent increasing volume as a sign of trend strength. Source: Tradingview.

For example, a rising asset should form increasing volumes, indicating strong bullish conviction. However, if we see rising price and declining volume, this suggests a lack of interest to us, meaning a pullback may be around the corner.

2. It can tell us if traders are losing interest in that asset

We can also use volume for our trading training to determine if the market has exhausted the direction of a particular asset. When there is a sharp change in price and a sharp rise in volume, it can suggest that the trend could be ending. Traders who are afraid of missing out tend to buy a lot, which causes strong volume growth. However, when everyone has bought an asset, the price stagnates and then falls because the market has exhausted all buyers interested in the asset.


The divergences and convergences between indicators and the price of an asset are very useful for interpreting volume. Source: Tradingview.

On the other hand, when an asset has bottomed, many investors have been forced out due to the price drop, causing high volume and increased volatility. The volume then decreases after the peak, although it may change again in the long term.

3. It can tell us the trend of an asset

A key indicator for defining trends is when the price of an asset is falling but volume is increasing, before a bounce in the asset's price, followed by another decline. If the asset's price does not fall below the previous low when it drops a second time, and the volume is lower during that second drop, it is usually a bullish indicator. We can also apply the same interpretation to detect upward movements that can lead to corrections.


The lows with lower volume with less pronounced falls can indicate a possible price reversal. Source: Tradingview.

Conclusions from this trading training

After having thoroughly explained the operation and interpretation of volume, we can determine that volume is essential for our trading training. This allows us to visualize moments in which resistance or support is formed, beginnings or changes in trends and even discover in which ranges a specific asset has been traded the most. We strongly recommend that you combine the use of volume with the vast majority of indicators that we are learning, since it provides us with very good support when interpreting the signals that the other indicators send us.

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