Hello, dear readers of the blog about trading. The meaning of today's topic, volume indicator and trading volume, for trading in general and swing trading in particular is hard to downplay. As they say, there are two objective factors in the market: price and, to a lesser extent, trading volumes. Some traders are more committed to this indicator, others less so. There are also those who do not use it at all. In this post we will analyze the practical meaning of what trading volume gives us. How often to use the volume indicator is up to you to decide for yourself.
What does trading volume tell us?
If you don't know anything about volume, let's first look at how stock trading volume works because in this market it is much easier for us to explain the concept.
Stock trading volume is simply a measure of how many shares are traded during each candle. For example, in this daily chart, 24,157,000 shares (rounded) were traded over the last day.
This can be key information when trading stocks. But we also need other information.
How many shares are outstanding?
It is very useful to know the total number of shares that are traded on the exchange. This is called a float.
When we check Yahoo Finance, we find that the total number of shares outstanding is 1.33 Billion shares. In stock trading, this is important because it helps us answer the question: “How much volume is high volume?”
So, in this example, 24 million shares is not a lot of volume compared to the 1.33 billion shares that are available for trading.
Now, if there was a day when 600 million shares were traded, that's almost half the total number of shares, and that would tell us that something very important is happening to the stock. This brings us to some other clues that trading volume can give us.
Let's look at three main ways to use volume to identify trading opportunities.
What is trading volume
Only 4 price values are available to the trader: maximum, minimum, opening, closing. All indicators are based on this data. But there is another source of information - trade turnover.
Trading turnover (Volume, Trade Volume) is the total number of units of an asset that participated in trading per unit of time.
On price charts it is displayed as vertical histograms. The greater the turnover, the higher the bar. Depending on the timeframe, the volume bar may show different values.
Here's what it looks like on real graphs:
Before the advent of computers, almost no one paid attention to information about trade turnover. She was published in few places.
Despite this, the first analyzes of volume were made by Joseph Granville (1976) and Larry Williams (1972). They tried to find patterns in the divergence between volume and price.
In online trading of the 21st century, this approach is unlikely to be profitable. It can only be taken into account in conjunction with other parameters.
Volume can show you market depletion
When you see higher volume as the price declines, it means investors are dumping the stock, and it could be a signal that it's time to sell off your shares too. Without a lot of volume, the price drop may just be a short-term dip before it moves up again.
A few big drops on high volume can also signal a good buying opportunity. If you think the company is solid but has simply been the victim of bad short-term news, this could be a great time to buy at a very low price.
In other words, it could signal a market bottom.
Let's look at Citigroup during the aftermath of the 2007 financial crisis. During 2008 the price decreased. Then, by early 2009 (points 1 and 2 below), we saw two large spikes in volume during two down days.
Let's look at volumetric analysis. There was some buyer interest at point #3, but the price did not increase significantly. Buyers step in to buy shares for short-term gain. However, at location #4 there was another huge jump in sales volume, but the price did not drop significantly. This was a sign that most sellers were out of stock at the time.
This is how we can use volume to show us when a stock has no more buyers and is ripe for buying.
Why are volumes so important?
Volume is one of the most important aspects of technical analysis and experienced traders always take it into account in their trading strategies to confirm trends and certain patterns on the chart.
Any price movement up or down with relatively large volumes is always more significant than a similar movement with smaller volumes. Therefore, whenever you see a strong price movement, you also need to pay attention to trading volumes, which ideally should also increase at this moment. [adsense1] For example, stock prices rose 5 percent in one day after a long downward trend. Could this mean a trend reversal? This is where trading volumes will help us. If they were also higher than usual during this rise, then this could be a good sign of a change in trend.
On the other hand, if volumes during a price increase were lower than usual, then this is a rather weak signal and additional signals are required here.
Volumes should move with the trend. If prices move up, then volumes should also increase (and vice versa). If volumes begin to decrease during an uptrend, this is usually a sign of weakening and you need to prepare to close the position.
When trading volumes do not correspond to price movements, this is a classic example of convergence. Convergence is any discrepancy between the readings of two indicators.
Volume can show the strength of movement
The general idea is that if you see an increase in volume in a trend, it is likely that you will continue to see price movement in the same direction. This makes sense because as a trend gains momentum, more people need to join in to keep the trend going.
Here is an example of a trend in oil where volume increases with an upward trend. Although these are futures and not stocks, the same principle applies. Once volume begins to dry up, the trend reverses shortly thereafter.
Postulates of volume and price
- The assessment should be made taking into account the current trend. Information about the last bar and volume will not provide any information without a general (global) picture of the market.
- The growth of an asset is almost always accompanied by an increase in volume. The same can be said about the fall.
- Volume often outstrips price. This can be explained by the fact that players create a powerful impulse that moves quotes in the right direction for some time.
- Huge volume always says something. But you can’t immediately understand what this means.
- The climax on the Volume indicator does not yet mean a full price reversal.
- Large volume combined with good news without price rollbacks indicate the emergence of a new trend.
- Declining volumes after growth indicate a slowdown in the trend.
- High rpm may indicate large resistance. Often this is followed by a flat, consolidation with pullbacks. This can last from several days to several months.
- When trading, you can’t focus only on volumes. This is not a panacea.
It is worth highlighting another popular rule:
If the price fell on a huge volume and rebounded sharply, and then at low speeds reached the same minimum and went up, then this is a strong signal for the emergence of a new trend. In technical analysis this is called a “double bottom”.
How does volume work in Forex?
After reading the previous examples, you are probably ready to add a volume indicator to your forex charts. Wait a minute because volume works a little differently in Forex.
First, it is impossible to determine how much of a currency is traded each day. This is because forex trading is a decentralized market.
Since there is no primary exchange through which all transactions pass, it is impossible to calculate how much currency is traded at one time. So, what you see on your charts is only the volume that your broker sees. This can result in very different numbers between brokers.
For example, here are two screenshots for EURUSD taken at the same time. This chart uses Oanda data and shows that the current volume is 8,156 currency units.
But when we look at the FXCM chart, we see a completely different picture. This chart shows a volume of 50,869 currency units.
If you look at relative volume, the charts are very similar, but not exactly. For example, the right side of this graph shows a large spike. However, the Oanda chart actually shows a decrease in volume.
Does this mean volume is useless in forex trading? Well, let's look at some examples to see if this can be useful, even if you only see part of the picture.
Volume analysis, or how to identify a major player in the Bitcoin market
05/08/2019 Guest materials
#trading volume#technical analysis#Bitcoin price
Novice exchange players build countless levels, trend lines, and use many different indicators. But most of them do not understand why they use this or that tool.
Can you say with confidence why the price should bounce from a particular level, trend line? Or why does it necessarily have to fall when it comes out of overbought conditions on the RSI indicator? What will be the real reason for this price movement?
The founder of the Coin Trade project, Alexander Marchenkov, and the head of the communications department, Ekaterina Skobitskaya, will talk about various methods of volumetric analysis that can increase the significance of signals from candlestick models, indicators and graphic patterns, as well as the effectiveness of forecasting price movements.
Volumes are one of the most reliable sources of information about the current state of the market and a trader’s faithful assistant in making trading decisions.
However, before moving on to the analysis of volumetric analysis methods, let's talk a little about the mechanics of the market. Knowing the basic laws by which prices move is extremely important. Trying to trade the market without a deep understanding of its mechanics is like playing poker without knowing the rules of the game.
In front of you is an exchange order book, which displays limit orders from traders to buy and sell.
At the top of the order book are sellers' orders, and at the bottom are buyer's limit orders.
Limit orders belong to traders who do not agree to make a transaction at the current market value of an asset and instead place an order at the price that would suit them. After that, they wait until the market price reaches the value specified in the order.
Ask is the price of the nearest sell order, Bid is the price of the nearest buy order.
If a buyer comes who is satisfied with the market price, he will buy with a market order from the nearest limit seller at the Ask price. If a seller comes along who is satisfied with the market price, he will sell with a market order to the nearest limit buyer at the Bid price.
Market orders will move the price if they absorb (satisfy) the nearest limit orders.
Thus, market orders move the price, while limit orders resist this movement. The more limit orders there are at a certain price, the more market orders will be required to overcome that price.
Large clusters of limit orders form so-called walls, which serve as an obstacle to further price movement.
To know where the price will go, it is necessary to predict the moment when an imbalance between supply and demand arises or, in other words, when market power exceeds the limit. Volume analysis will help with this.
Market volume can be presented in three types - vertical, horizontal and cluster. You can analyze volumes using various services: Trading View, TensorCharts.com or on the Tiger Trade platform.
Vertical volume
Typically, vertical volume is displayed as a vertical histogram at the bottom of the chart:
Hourly BTC/USD chart of the Bitfinex exchange from TradingView
Each bar of the histogram shows the total volume of transactions completed within one candle. For example, if the chart timeframe is H1 (hourly), the bar will show the volume for one hour. By the size of the column you can find out the value of this volume relative to other candles. The higher the bar, the greater the traded volume, and its color corresponds to the color of the candle.
Now let's talk about how you can use vertical volume in analysis. Here is an hourly chart of a perpetual contract for Bitcoin on the BitMEX exchange:
Hourly chart of perpetual swap on Bitcoin exchange BitMEX from TradingView
Horizontal levels are marked in places where the largest number of stop orders are supposed to be located.
A stop order is a pending order to execute a market order. It is set at a certain price, upon reaching which an order is sent to the exchange to execute a market purchase or sale. A stop order differs from a limit order in that with its help, for example, you can place a pending buy order above the current price.
Traders typically use a stop order when they want to buy or sell an asset when it breaks out of a certain level. A stop order is also used to insure against possible losses. For example, you can place a stop order to sell below the current price. Then, in the event of a strong fall, the platform will automatically sell the asset, limiting losses.
Let's go back to our schedule. Many traders place stop orders behind price peaks, which are local highs and lows, or beyond the boundaries of a flat. You can build levels using such points. And the more obvious the level, the more traders will place their orders for it. This is an important element of market psychology that every stock market player should know about.
Hourly chart of perpetual swap on Bitcoin exchange BitMEX from TradingView
If the price breaks through this level, then a large number of stop orders are triggered. For example, when a lower level is broken out, sell stops are triggered, and many market sales occur. If the price breaks through the upper level, then buy stops are triggered and many market purchases are made.
As already mentioned, it is market orders that move the price, and limit orders, on the contrary, slow it down. The simultaneous activation of a large number of stop orders can significantly accelerate the rise or fall, unless, of course, the price encounters a sufficient number of limit orders along the way.
Hourly chart of perpetual swap on Bitcoin exchange BitMEX from TradingView
A false breakout of this level is a very strong signal. If the price did not continue its movement due to triggered stop orders, this means that all liquidity was absorbed by the market, and, most likely, the price will move in the opposite direction. Why is this happening?
Let's imagine that the price breaks the level down. At the same time, stop orders are triggered, which leads to a large number of market sales. But the sellers were met by limit buyers, who absorbed all the supply and thereby stopped the fall. There are no people left willing to sell, and the price freely returns to its starting point, without encountering resistance along the way.
This is exactly how the mechanics of a false breakout work. In this case, it is obvious that buyers clearly prevail over sellers, and the price will go up rather than down.
By overlaying levels on the chart, we are actually only suggesting that there are many stop orders behind these levels. How can you increase confidence in the correctness of trading decisions? This is where vertical volume comes to the rescue.
Hourly chart of perpetual swap on Bitcoin exchange BitMEX from TradingView
If high volume appears on a candle that has broken through a level, this means that this level was really interesting to traders and that many transactions were made there. This in turn confirms our theory about the large number of triggered stop orders and increases confidence in the reliability of the market signal.
Also, vertical volume can enhance technical analysis graphic patterns and candlestick patterns:
Hourly chart of perpetual swap on Bitcoin exchange BitMEX from TradingView
Market profile (horizontal volume)
In the chart below, volume is presented as a horizontal histogram:
The indicator is superimposed on a certain area and shows volume at different price levels in the form of horizontal bars. The longer the bar, the more volume relative to other price levels is in the selected area. Using this tool, you can, for example, see at what prices the maximum volume was traded over the last week or for any other time range. This tool is available on the TradingView.com service, as well as on the Tiger Trade platform.
On TradingView, the Volume Profile is only available through a subscription, which is free for 30 days. After subscribing, this tool can be found in the Indicators menu, Volume Profile section. We use the Fixed Range profile tool, which we stretch to the desired area of the graph.
Now let's talk about how you can use this tool to predict price movements. Here is the daily chart of the OAX coin on the Binance exchange:
OAX/BTC chart from TradingView
As you can see, at first the downward trend slowed down, and then gradually turned into a flat. We have overlaid the market profile on the corresponding section of the chart to see the bigger picture.
How to identify the activity of a major player?
It's no secret that on the market there are both small traders who trade relatively small amounts, and large ones who have huge amounts of money at their disposal. With their transactions, whales can significantly influence the price.
If a large trader wants to purchase a certain coin for a substantial amount, he cannot absorb the entire volume at once, in one transaction. This happens because at this very moment there are usually not enough sellers capable of satisfying the conditions of such a large order. If a major player tries to get the entire volume with a market order, this will provoke a powerful price impulse. The transaction will simply be spread across the order book, and the average execution price of the trading operation will be noticeably different from the original one.
This is why large traders are forced to resort to various tricks to gain positions. For example, arrange false breakouts or accumulate positions gradually, carefully buying up an asset during a sideways price movement.
Let's go back to the OAX coin chart. Using the Market Profile, we can see how volume has begun to enter the coin. Thanks to this, the downward trend first slowed down and then completely stopped. This suggests that such low prices could attract large buyers, who gradually began to accumulate positions, buying out the market supply. It is also possible that the whales have some insider information on this coin, which was the reason for the purchase.
Insider trading is still quite common in the cryptocurrency market, which is likely due in large part to legal uncertainty. For example, in this market it often happens that large purchases occur long before positive news is released in the media.
But it is not always necessary for a major player to have any important information. After all, he can influence the price with his money. For example, first, gradually buy out the entire supply of a coin, and when there are no people left willing to sell, simply push the price up with another purchase.
Other traders will see that the structure of the downward trend is broken, while indicators indicate growth, and will begin to actively buy. These purchases will be enough to greatly influence the price - after all, there are no people willing to sell, and, therefore, there is no one to resist the upward impulse. The price will follow the path of least resistance.
If you see that the downtrend has slowed down and a horizontal flat has begun, use the horizontal volume indicator. In many cases, it will clarify the situation and give a quality signal to buy. Also, the Volume Profile can enhance signals from reversal patterns.
Let's consider a few more interesting situations:
Cluster candles
In essence, these are ordinary candles, only inside them there is a volume histogram. Each bar of the histogram shows the amount of traded volume at a certain price within a given candle. And on these columns there are exact numerical values of the volume.
The columns contain two numerical values:
— on the left — the volume of transactions at the Bid price or the volume of market sales (limit purchases); — on the right — the volume of transactions at the Ask price or the volume of market purchases (limit sales).
The value of the histogram column is the sum of the total volume, that is, market purchases and sales are summed up. The greater the total volume of transactions at a certain price, the longer the bar.
The color of the bar depends on which market transactions there were more - purchases or sales. If there are more market purchases, the color of the bar will be blue. And if market sales prevailed, then the bar turns red. Cluster candles are available on the Tiger Trade platform.
Cluster analysis complements candlestick patterns well. Let's look at an example of a trading situation:
A false breakout occurred, which resulted in the formation of the Inside Bar candlestick pattern. Overlaying the profile, we see that the main volume was traded at the top, which means that market buyers encountered limit resistance that they could not overcome. We see confirmation of this thanks to cluster analysis - at the top of the candles, a large number of market purchases were made, which ultimately did not lead to growth.
It is worth mentioning tensorcharts.com separately. This service allows you to analyze the history of limit densities (walls) directly on the chart in a very convenient form. This further expands the picture of the market: everything that happens can be seen literally in full view.
***
Observing price and volume, clusters and walls is extremely useful when learning to trade - after all, only through independent observation and analysis can you understand how the market works.
It doesn’t matter which analysis tools you use, the point is not in clusters and volumes. Even one candlestick chart is enough for profitable trading.
The most important thing is knowledge of the psychology of market participants and the ability to predict their actions. Always look at the price from this point of view only. Look for patterns based on this logic and trade them. Observation and practice will help you develop this logic.
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Let's sum it up
Forex volume can give us some clues about where the price might go next. However, since we only see volume from one broker, it is difficult to trust the numbers to give us an accurate picture of how much currency is traded in the entire market.
If you want to test a trading strategy that includes volume as a trading signal, be sure to use data from the broker you will be trading with. It is very important.
There are times when volume can signal the possible direction of the market, but for the most part volume is too flat to make any real trading decisions. Check it out and see for yourself.
