Volume

What is Volume?

Volume is one of the most important measures in trading and investing, allowing one to track the total quantity of such an asset. The strength of some market move or some trend can also be verified by volume; as high as the number of participants, most probably there will be passion for the activity in question.

It is also measured by volume for different stocks bonds commodities and cryptocurrencies and even for different intervals like minutes hours days or even weeks.

What Volume Measures?

Volume is an indicator of how many units of an asset, such as equities or cryptocurrencies, change owners. Each transaction contributes to the volume figure in terms of the number of units sold or bought.

This means that when a stock is bought and sold in the trading session and 500 shares are traded, then the trading volume for that session is equal to 500. Volume can be affected by news, earnings, and market trends, as such events stimulate or reduce the desire of traders to hold a certain asset.

Factors that Make Volume Significant When Trading

Volume is one of the most significant determining factors in trading and technical analysis owing to its features:

1. Confirmation of trends. Volume allows one to establish the ‘weight’ of the price trend. When an asset’s price is pushed higher or lower with high volume, it means there is great market activity, and thus the trend is more likely to be maintained. However, a price change that has occurred with lower volume may not be so conclusively safer, as the signal may be that the trend is likely to end or shift.
2. Breakouts and reversals. High volume, when an asset’s price breaches an important support or resistance level, indicates that the breakout is justified. Breakouts are expected to have a surge in volume, and this is because there is a new change of direction in the price and many traders’ attitudes are in that direction. On the same note, if there is little volume accompanying a breakout, it may mean that this is a fake breakout whereby the price will fall back straight away.
3. Liquidity indicator. Volume shows the ability to convert an asset into cash. When there is high activity in the markets, that is, a lot of sellers and buyers in the market, it is easier to make sales or purchases with less dramatic price variations. Low-volume trading on the other side may promote enhanced price fluctuations, or the price concerning asset sales or purchases could be difficult without moving the price.
4. Market sentiment. As the market volume trend changes, one may also read into the sentiment prevailing in the market. One possibility is that everyone was planning to buy, and hence, when the price fell suddenly, there was volume all over as everybody was rushing to exit the panic and volume.

Volume And Order Flow

Volume is not an independent metric, it cannot exist on its own without linkages to other key metrics. Here are a few volume correlation metrics that can be used for predictive purposes.

On-Balance Volume (OBV)

On balance, volume (OBV) is an indicator of stock momentum, and it uses volume as an indicator for predicting price movement. OBV is calculated by using the days’ base volume. Volume is added to OBV on the creation of up days and deducted on down days, so traders are able to tell if the volume is in support of the trend in price.

Volume-Weighted Average Price (VWAP)

VWAP is a standard against which the quality of execution can be measured that shows the average price of an asset, weighted according to its trading volume, over the period of a day. When considering executable prices, traders have this general context of how good or bad those prices are using the volume-weighted average price.

Volume Oscillators

These are also known as indicators of the momentary changes in volume over a period. Such analysis helps in anticipating the changes in market trends and reversals by looking at the volume ratio compared to historical averages.