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Part 32: Technical Analysis – Why and How to Track Volume

Every trader is different. Some believe in fundamental analysis and in the values of unemployment, others use technical analysis in the form of moving averages and some traders rely on a net price action chart. Everyone certainly thinks that his strategy is the best and volume-traders are of course no different.

But is the market volume really so significant and can you base your entire trading strategy solely on this indicator?

What is market volume?

Market volume can be viewed from two perspectives. The first brings a view of volume over time and a the second a view of volume at a given price. Each of these views has its role and can be used to determine the input or output of a position.

The histogram that appears on the x-axis, often also at the bottom of the graph, typically displays the value of trades that have occurred over a given period of time. This time period is given by timeframe. If you are on a 5-minute graph, one line in the histogram shows the size of all trades in the last 5 minutes. This graph is typically viewed in MT4 or TradingView when you choose to add a volume indicator.

market volume

Market volumes can be found here

TIP: Use the volume profile indicator to find volume at a price instead of a candle. More information can be found in the article: What is market profile and volume profile.

What volume interprets

As you know, supply and demand or buyers and sellers clash on the market. So, if we are in a growing trend, we want to see a growing volume. The growing volume will show us that higher prices are accepted and that they may go even higher. Conversely, decreasing volume means declining interest and the possibility of ending or even reversing the trend.

Declining volume is a good signal for market turnover. If it is used correctly, for example in combination with a stochastic indicator or ADX, it can be a relatively powerful tool for confirming reflections from resistance lines.

The use of volume

Based on the paragraph above, you can already derive everything you need to know, but let’s recapitulate it. If the volume grows, the trend is gaining strength, and prices are accepted. If the volume is declining, the growing trend is already being depleted.

But that’s not all. Now perhaps the most important thing – small volume growth or decline is not a strong signal. Contrariwise, a significant change in the price of a large volume is a strong trading signal. This is very important and also, logical.

Trading strategies using volume

Volume in the form of a histogram, i.e. volume over time, is very often used to confirm enter or an output from a position. It is advisable to supplement this indicator, but at the same time, I would not take it strictly as something complementary, because its information is really very important.

If you would like to build an entire trading strategy on volume, then it is perhaps better to use volume profile in a form of volume to a given price level. I don’t want to claim that this is complicated. On the contrary. However, at least in the beginning, you will have to grapple with the data display and its quality. There is a solution in the form of Ninja Trader and futures data, but this also means more programs, more windows, and more detailed analysis. You would definitely succeed in making it work and personally, I am very familiar with this style of trading, but I would start by tracking the histogram and volume to the time slot and keeping the volume to the next level. We will definitely return to this topic.

Try to look at the volume offered by your broker, then backtest and evaluate. I know that you are already attracted to volume profile as I would be eager myself, but you need to move forward gradually. It is also worthwhile to progress more slowly and more thoroughly in studying information, not just trading. It will provide you with the knowledge that you can rely on.

If you have any questions, let us know in the comments.


J. Pro

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn't very successfull with dropshipping on Amazon and other ways of making money online, and I'd only earn a few hundreds of dollars in years. But then binary options caught my attention with it's simplicity. Now I'm glad it did because it really is worth it. More posts by this author

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