Volume Analysis

In short: Volume is how much was traded in a given period. Traders use it to judge whether a price move has broad support. It is a confirmation, not a forecast, and not every volume figure is equally reliable.

What is volume?

Volume is the number of shares (or contracts or coins) that changed hands in a period. Under most price charts you see it as bars. Every trade has a buyer and a seller, so volume says nothing about who “wins”. It says how much attention and activity there was.

The idea behind it: a price move that many traders take part in is usually more serious than a move on thin trading. That is a rule of thumb, not a law.

Relative volume

The absolute figure says little. Compare it with the average. Relative volume is the current volume divided by the average volume over, say, the last 20 days.

An example: a stock trades 500,000 shares per day on average. Today it is 900,000. Relative volume = 900,000 ÷ 500,000 = 1.8. So volume is 1.8 times as high as normal. Around 1 is normal; well above 1 is notably high; far below 1 is quiet.

Pay attention to the time of day. At the start and end of the trading day volume is usually higher than around midday. So do not compare a midday hour with an opening hour.

Volume in trends and breakouts

Volume with the trend

In a healthy uptrend volume is often higher on rising candles and lower on small pullbacks. That suggests the move has support. In a downtrend the opposite applies.

Breakouts

In a breakout above resistance (see Support and Resistance) traders check whether volume is clearly higher than normal, for example more than 1.5 times the average. That is a common rule of thumb and not a fixed limit. A breakout on low volume is more often a false breakout. But breakouts on high volume also fail regularly.

Exhaustion (climax)

After a long move, a spike in volume with a strikingly large candle can be a sign that many traders are entering or exiting at once. Sometimes that is the end of the move. Sometimes not. Always look at what the price does next, for example using candlestick patterns.

Volume and price diverge

If the price makes a new high but volume is lower than at the previous high, interest may be fading. It is a warning. The price can simply keep rising.

Two volume indicators

OBV (on-balance volume)

OBV adds the volume of rising days and subtracts the volume of falling days. An example: day 1 rises on 100,000 traded (+100,000), day 2 falls on 80,000 (−80,000), day 3 rises on 120,000 (+120,000). OBV = 100,000 − 80,000 + 120,000 = 140,000. The absolute figure is not important; the direction is. If OBV rises along with the price there is “confirmation”. If it falls out of step, that is a warning, similar to divergence with the RSI.

VWAP (volume-weighted average price)

VWAP is the average price of the day, weighted by volume. Calculation example: 100 shares trade at €10 and 200 shares at €11. VWAP = (100 × €10 + 200 × €11) ÷ 300 = €3,200 ÷ 300 = €10.67. Many day traders use it as a reference: a price above VWAP is seen as relatively strong, below it as relatively weak. That is an interpretation. VWAP restarts every day and is mainly useful for intraday trading.

Worked example (hypothetical)

Suppose stock X trades 500,000 shares per day on average. The price closes above a resistance of €25.00 at €25.40 on 900,000 shares (relative volume 1.8). You buy at €25.45.

• Stop-loss: €24.80 (below the old resistance). Risk per share: €25.45 − €24.80 = €0.65.
• Price target at 2:1: €25.45 + 2 × €0.65 = €26.75.

High volume does not turn the odds into certainty. The price can fall back below €24.80; then your stop-loss limits the loss. Run your own numbers with the risk/reward calculator.

Limitations

• A clue, not a forecast: high volume can also confirm a sharp decline.
• Differs per market: for stocks volume is usually easy to follow, although trading takes place on several venues. In crypto, volume is spread across many exchanges and is not always reliable. For currencies there is no central volume; platforms often show tick volume.
• Distortion: fake volume (wash trading, trading with yourself) occurs on some crypto exchanges. That makes the figures less usable.
• Time of day: volume is higher in the morning and at the end of the day. So compare at the same time.
• News days: around company results or interest rate decisions volume is high, even without a “technical signal”.
• Small stocks: with thinly traded stocks one large order can distort volume strongly.

Practice questions

Try to answer them yourself. The answers are in the text.

1. How do you calculate relative volume?
2. Why is a breakout on low volume more often a false breakout?
3. Why can volume be misleading for crypto and currencies?
4. What does VWAP show?

What next?

Use volume as confirmation alongside trend, levels and patterns (see Combining Multiple Indicators). Test on historical data and practise with a demo account before you risk real money.