Volume Trading: All you Need to Know

Today I am going to focus on volume trading or rather trading with volume.  

The reason this topic has grabbed my attention is because at some point I was using a trading strategy that was dependent on trading volume.

In this case, I was using volume in trading for confirmation after verifying the other entry triggers using the naked price charts

What is Volume?

Volume signifies all recorded trades for a currency pair or a security such as stock in a certain period of time. 

The period could range from the one-minute charts to the daily charts or even weekly charts. 

Many trading platforms tend to print every volume bar either as green or as red. 

The green bars are printed when a stock or currency pair closes up for a given period, while the red bars show that a stock or currency pair closes lower for a specified period.

Most volume traders tend to get this wrong. The color-coding does not necessarily signify the increase or decrease of volume for that period. 

It is simply a representation of the way the stock or currency pair closed.

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The image above is an example of tradingview volume indicator.

What is volume trading?

This is when traders use volume to view the importance of some moves in the markets. Volume here simply means the amount a certain asset trades over time.

Volume is essential in trading but is mainly overlooked by retail traders for various reasons.

Why Trading Volume Analysis is Overlooked

Trying to use volume as part of a trading strategy and questioning if data offered by their broker can be relied upon are among the hardest elements traders have to decipher.

Majority of the brokers who offer volume trading data would be issuing the trades volume placed by the clients on that particular platform.  

This is contrary to the entire market volume, which has the potential to do better in understanding where the market will move to.

The biggest issue is that this data costs money, and it is easier to get data for some markets compared to other markets.

Take a look at the forex market, where we have over 5 trillion dollars daily exchange from transactions on various platforms.

Forex has a decentralized nature that is not easy to quantify.

This is why it’s always hard to get a perfect volume indicator out there despite there being numerous volume trading indicators out there.

For there to be a favorable volume indicator, it ought to derive data from almost all of the trading platforms for this data to be fully relied upon.

It is also important to know that volume normally signifies the troughs and peaks of trading activities for the given timeframe, as I have mentioned above.

In an example, the DAX 30 will basically experience a high rise in volume at the open (crossover with Asia) as well as at the close (crossover with the US) of the market.

Types of trading volume

Trade volume

Trade volume is the most common among other volumes.

It is largely used to show all the contracts traded at a specified time.

This volume informs investors about the market’s liquidity and activity.

When the trade volume is high, then there is high liquidity that results in better order execution.

Tick volume

Since the forex market is decentralized, it is not possible to keep tabs on the amount and size of all the traded contracts in a given period of time.

Therefore, as an alternative to trade volume, traders go for tick volume.

Tick volume stands for the amount of price changes over time. The big variance is that tick volumes signify the number of times there was price change in a certain period and not really the specific bid/ask volume.

Imagine that when prices change 150 times in just 5 minutes, then the activity is higher than when prices only change 70 times.

In such markets like forex that are decentralized, tick volumes represent a good proxy for the actual traded amount.

Normally, the more price changes in a certain period, the more the transactions are being executed. This is something that shows a higher volume.

Information Derived From Volume 

Volume trading can be an okay trading strategy because volumes are able to lead or confirm main price movements.

Before you open a position, you can look at trade volume to understand the direction of the price movement.

Knowing the levels of volume could enable you to decide the best times to enter a trade.

High volume when there is a large price movement could be a sign that the trend is strong

In times when there is a high demand volume when the market is in a downtrend or high supply volume when the market is in an uptrend, it could be a sign that the market is likely to reverse.

Volume makes it possible to identify important levels of distribution, accumulation, and congestion zones. 

There are zones where there is plenty of demand and supply; hence traders could experience too much resistance.

When using a volume indicator, you can be able to identify these levels or zones.

Volume normally shows what large traders or big banks are up to

It gives you an idea as a retail trader whether they are buying or selling.

Large traders are those who have the ability to move prices any time they take a position. Thus, it is best to associate with them and benefit from their actions.

When you look at volume and price action, it is possible to tell if there is a higher demand or supply in specific areas.

Trading in line with the big banks will ensure that you are rarely stopped out in the positions that you take. This is among the beauties of volume trading when used appropriately.

How to Use Volume in your Trading

As I always tell you, in case you are using an indicator in forex trading, let it be for supplementing your price action analysis.

Use it for confirmation and not the primary tool of analysis. Your trading abilities will improve significantly the moment you heed this advice.

In this case, it means that you will also be using volume as a confirmation tool.

When there is an upward surge in price, there is the question of if the trend is accompanied by a big volume uptick to give important information on whether it is worth taking note of the increase in price.

Market sentiment Assessment through volume

Volume trading is about conviction, and a move in the market which is made on low volumes is less convincing compared to a widespread involvement in a round of buying.

Once volume increases but falls when there is a price drop, then it is bullish.

Equally, when the volume goes high during downward movements but decreases during upward movements, then that is a bearish signal.

Ascertain whether volume supports the wave on the market

Volume can also be used by noting the way it supports or fails to support every wave in a market.

An uptrend that experiences increasing volume upwards and reducing volume on the retracements is likely to go on moving in the same direction.

Nevertheless, it is okay to get concerned about an uptrend that has rising volume on a downward trend that ends up declining when the market moves higher.

Look Out for sharp market moves supported by volume rises

A sharp market move that comes with an important volume rise may give a trader a lot of confidence that the market would retain the trail in the future.

Conclusion on Volume Trading

I hope you have learned something about volume trading.

Volume can give important information when you are executing your trades.

When volume analysis is not used for any other reason, it can help to isolate stocks or currency pairs a trader is looking into for trading during that day or any other period.

When trading stocks or currency pairs, you ought to have more average volume to make it possible for you to enter and exit the trade swiftly.

With this, you are able to take charge of risks and thus manage losses as you wish with reduced price slippage.

One can also analyze the trend of a stock or currency pair using volume, hence assisting in reviewing the possibility that a trend will go on.

Volume analysis only gives supplemental information and is not perfect. As a result, you should not feel pressured to begin analyzing volume when you are executing trades if it is not in your trading plan.

Trading decisions ought to primarily be centered around price movements because it is the price movements that define profits and losses.

Draft your trading plan as per price movements and include volume trading analysis only if you think it will better your trade performance.

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