What Is Trading Volume and How Do You Interpret It?
Trading volume (Volume) is one of the most important tools used by traders in technical analysis, as it helps understand the strength of price movements and the level of trader interest in a specific financial asset, whether it’s a currency pair, a stock, a cryptocurrency, or a commodity such as gold or oil.
Simply put, trading volume shows the amount of activity that occurred during a specific time period and helps you determine whether a price movement is supported by strong trading activity or is a weak movement that may not last.
Trading volume is the total number of shares, contracts, or units traded for a specific financial asset (stock, currency pair, cryptocurrency) during a specific time period (hour, day, week).
Trading volume is considered one of the most important tools used by traders in technical analysis because it helps understand the strength of price movements; it acts as the fuel that drives the markets and measures the amount of liquidity flowing into the asset.
- If the trading volume for a particular stock is one million shares during a single trading session, this means that one million shares were traded during that session.
- If trading volume for Bitcoin increases, this indicates heightened buying and selling activity.
- In the Forex market, many platforms display trading volume as “Tick Volume”—that is, the number of price changes during a specific period—rather than the actual volume of funds or contracts traded in the entire market.
The Importance of Interpreting Trading Volume
Trading volume helps you understand whether a price movement is genuine and supported by institutional liquidity, or whether it is merely a weak, artificial movement.
Here are the most important basic rules for interpreting it:
1- Trend Confirmation
• In an uptrend: Trading volume should typically increase with each new price high and decrease during downward corrections.
This indicates that buyers are in control and the trend is strong.
• In a downtrend: An increase in trading volume as prices fall reflects strong selling pressure and confirms the continuation of the downtrend.
2- Identifying Weak Momentum and Reversals (Divergence)
• If prices are making new highs while trading volume decreases over time, this indicates weak momentum and the imminent end of the uptrend (waning buyer interest), signaling a potential reversal.
3- Validity of Breakouts (Breakouts vs. Fakeouts)
• Real Breakout: When the price breaks through a strong resistance level accompanied by heavy trading volume well above average, this confirms the influx of real liquidity and institutional interest, and the breakout is often successful.
• Fakeout: If the price breaks through resistance with low trading volume, this is often a “fakeout,” and the price will quickly return below the resistance level.
4- Accumulation and Distribution Phases
• Accumulation: After a long downtrend, the appearance of candlesticks with very high trading volume and narrow (sideways) price movement indicates that large investors and institutions are quietly buying and accumulating shares.
• Distribution: After a long uptrend, the appearance of massive trading volume coupled with the price’s inability to rise indicates that market makers are selling to retail traders in preparation for a downtrend.
The Volume indicator typically appears below the chart as vertical bars, each representing the trading volume during the corresponding candlestick, as shown in the chart below
How do you read the Volume indicator?
Interpreting the Volume indicator does not depend solely on whether the bars are rising or falling; rather, it must be considered in conjunction with price action and market trend.
1. Increased Trading Volume
When the Volume bars rise significantly compared to previous periods, this indicates increased trading activity.
This may suggest:
- Increased trader interest in the financial instrument. - Strong price momentum if the increase coincides with a clear price movement.
- The likelihood that the trend will continue if the movement aligns with the overall trend.
2. Decrease in Trading Volume
A decrease in trading volume indicates a decline in activity compared to previous periods and may suggest:
- Weak trader interest in the market.
- Weak momentum behind the price movement.
- The possibility that the current trend is losing strength.
However, a decline in volume does not necessarily mean a trend reversal.
3. Rising Price Accompanied by Rising Trading Volume
When the price rises in tandem with increased trading volume, this may indicate strong demand for the financial asset and that buyers are actively participating in the upward movement.
This is considered a positive signal of trend strength, especially if it occurs during a breakout of a significant resistance level.
4. Price Decline Accompanied by Rising Trading Volume
If the price falls while trading volume rises, this may indicate increased selling pressure and that sellers are dominating the market.
The signal becomes even more significant when the decline occurs after a break below a key support level.
Common Mistakes When Interpreting Volume:
There are some mistakes traders make when using the trading volume indicator:
- Considering an increase in trading volume as an automatic buy signal, even though it may also reflect an increase in selling.
- Relying on volume alone without analyzing price action.
- Comparing trading volumes across different time periods without taking into account differing market conditions.
- Ignoring the nature of the market, especially since trading volume in spot Forex differs from that in centralized exchanges.
- Entering a trade immediately after a resistance level is broken without waiting for confirmation of the breakout.
Ultimately, trading volume is an important tool for assessing the strength of price movements, confirming breakouts, and understanding buyer and seller activity.
However, it should not be relied upon alone for making trading decisions; rather, it is best to combine it with price action, support and resistance levels, and trend and momentum indicators.
