Volume — The Hidden Indicator
Understand why volume matters more than most traders think. Learn to read volume spikes, divergences, and confirmations.
Price tells you what happened. Volume tells you how much conviction was behind it. A big price move on low volume is suspicious. A big price move on high volume is significant. Learning to read volume separates serious traders from gamblers.
What Is Volume?
Volume is the total number of shares, contracts, or units traded during a given period. If 5 million shares of Vodafone were traded today, that's the daily volume.
On most charts, volume appears as bars at the bottom. Green bars usually mean the price closed higher than it opened; red bars mean it closed lower. Taller bars mean more activity.
Volume Confirms Trends
In a healthy uptrend, volume should increase as the price rises and decrease during pullbacks. This tells you that more people are buying on the way up and fewer are selling during dips — the trend has strong backing.
If the price keeps rising but volume is declining, that's a warning sign. The rally is running out of steam. Fewer traders are willing to buy at these higher prices. This divergence between price and volume often precedes a reversal.
Volume Spikes
A sudden surge in volume — well above the average — is called a volume spike. These demand your attention because they signal that something important is happening.
Spike at support: If a stock hits a support level and volume explodes, it often means institutional buyers are stepping in. That support is likely to hold.
Spike at resistance: If volume surges as price breaks through resistance, that's a genuine breakout. Low volume breakouts are more likely to be false breakouts.
Climax volume: An extreme volume spike after a long trend often signals exhaustion. After a prolonged selloff, a capitulation volume spike can mark the bottom — everyone who wanted to sell has sold.
How to Use Volume in Practice
- 1.Add a 20-period volume average to your chart — it shows what "normal" volume looks like
- 2.Before entering any trade, check: is volume supporting the move? A breakout on 3x average volume is much more reliable than one on half the average
- 3.Watch for volume divergence — price making new highs while volume decreases. This often leads to a reversal
- 4.In forex, volume data is less reliable since it's a decentralised market. Use tick volume as a proxy
Volume Profile: Advanced Concept
Volume Profile shows volume traded at each price level (not time period). It reveals where the most activity happened — the "Point of Control." Prices tend to gravitate back to high-volume zones. This is used by institutional traders and is available on platforms like TradingView. Worth exploring once you're comfortable with basic volume analysis.
Risk Warning
Trading and investing carry significant risk. You can lose more than your initial deposit when trading leveraged products. Past performance is not indicative of future results. The content on TradeLearn is for educational purposes only and should not be considered financial advice. Always do your own research and consider seeking advice from a qualified financial adviser before making investment decisions.