Trading Volume

Definition of trading Volume

Volume is a figure that tells us the number of trades closed in a given time frame of an asset. In other words, it only tells us the number of securities traded: when someone buys, someone sold, so it measures the number of transactions.

It is fundamental for decision making, as it helps us to know what the big investors and institutions are doing: those who have the capacity to really move the market.

Volume by itself does not tell us anything (in isolation), that is why it is measured in relation to the previous bars, as this will tell us if it increases, decreases or remains stable.

Volume should accompany the price trend, i.e. increasing with the trend (whether bullish or bearish). Increasing along with the trend tells us that it is a strong trend.

Analysis using Trading Volume

If an uptrend has increasing volume, especially at the beginning, it is a strong trend. But that volume will decrease as we reach resistance, an area where we will see a decrease, this is where it indicates weakness.

If we were long or positioned to the upside, and we have already seen that we are winning while the uptrend continues with a high volume, when the volume is stagnating or decreasing we should close the winning trade, because the low volume gives us a sign of weakness and the price of the asset could reverse. That is what volume is for, and it is a piece of information that we should never miss, we show it below, with two examples of increasing and decreasing volume and their respective trend:

trading volume chart

It is usually represented with two colours (usually red and green as seen in the graph) to make it easier to quickly find which is the volume bar associated with a candle, being the same the colour of the candle and the colour of its volume bar.

Although depending on the platform you use they may not match. As it only indicates the number of transactions, you can put it in a single colour, to avoid confusion. After all, volume measures the activity in a market, meaning whether there is interest or not. Therefore, high volumes matter to us as they indicate that there is a lot of interest, and low volumes indicate that there is little interest, as shown in the graph above.