A trader should analyse many factors to become successful. One of such is trading volume. What is it and how to use the knowledge about it in trading? You will get the answers in today's article.
- 1 What trading volume is
- 2 Using volume in your trading
- 3 Summary
What trading volume is
Trading volume is a measure that says how much of a certain instrument has been traded over a specific time. It gives the number of contracts in options and futures or the number of shares in stocks.
What information does trading volume provide?
By learning what trading volume is you can estimate the market strength. When the volume is increasing and the market is rising, a trend is getting stronger. But when the volume is increasing and the prices are falling, it means a downtrend is accumulating strength.
When the volume decreases and the prices are not creating lows or are reaching new highs, you might expect a trend reversal.
How to attach the Volume widget to the chart
You can add the Volume widget to your IQ Option chart in just a few steps. Click on the indicators icon and go to the Widgets tab. Find Volume on the list. On the right side, you will be able to enable or disable the widget. Once enabled, it will appear beneath the price chart.
Trading volume is vital in technical analysis as it shows how big the current interest in a particular asset is. There exist indicators that are relying on trading volume such as Klinger Indicator or Balance Volume.
Using volume in your trading
Generally, traders seek opportunities to enter transactions during a strong move. Sometimes they open trades in the opposing direction of a weak move.
Trading volume should be considered by looking at quite recent data. Comparing the present volume to that from a couple of years ago may not bring relevant information.
Let's see how you can utilise information about the trading volume.
To confirm the trend
The bigger interest in a specific financial instrument, the higher the volume and market rise. When they diminish, it suggests the enthusiasm of the buyers is decreasing and the trend may reverse.
A strong signal that something significant is going on is received when the price rises or falls on a large volume. When it happens on little volume it does not provide a powerful signal.
To catch exhaustion moves
Exhaustion moves are the sharp price moves on sharp volume increase. They are read as a signal of the end of the trend.
To identify trend reversal
A change in the prices can be expected when the price starts to range on a heavy volume and after a long move up or down.
To receive a bullish sign
A bullish sign is received when the price is falling but the volume rises, then the price goes up and then back down. The price does not drop under the previous low and the volume decreases on the second move down.
To discover false breakouts
The breakout from a pattern or a range happens when the volume rises. This is showing a strong interest. A false breakout may be identified when there is no big difference in volume or it is decreasing.
Trading volume is a useful tool that can improve your performance. It provides information about the size of interest in a specific financial asset.
Generally, it implicates the market strength. You can use it to confirm the trend or predict possible changes in price direction.
Use some extra tools to determine the best time to open and close your trading positions.
Remember about the IQ Option demo account, available for free, where you can practice a new trading approach without fear of losing your money.
I would be happy to hear from you. Share your experience in the comments section below.
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