Trading with Volume

1. What is Volume in Trading?

Volume is the total number of shares, contracts, or lots traded in a market during a particular period. Every time a buyer and seller make a transaction, it adds to the volume count.

For example:

If 10,00,000 shares of a stock are bought and sold during a day, that stock’s daily volume is 10 lakh.

If Bitcoin has 50,000 transactions in a 1-hour timeframe, that is its hourly volume.

Volume acts as the pulse of the market. When market participants are active, volume increases. When they lose interest, volume shrinks.

2. Why is Volume Important for Traders?

Volume helps traders answer critical questions:

a. Is the trend strong or weak?

A price trend supported by high volume is considered trustworthy. A trend on low volume is often weak and may collapse.

b. Is the breakout real or fake?

Strong volume during breakouts confirms genuine market interest. Low-volume breakouts often fail.

c. Is a reversal coming?

Volume spikes at tops or bottoms often indicate exhaustion and potential reversal.

d. Where are big players active?

Institutional traders like banks, funds, and smart money leave “footprints” through volume surges.

Thus, volume is a confirmation tool that helps traders avoid traps and make informed decisions.

3. Understanding Volume in Different Market Conditions
a. Volume in Uptrends

When volume rises along with price, the uptrend is considered healthy. Buyers are active and willing to buy at higher levels.

Signs of strong uptrend:

Price ↑ and Volume ↑ → Strong bullish trend

Pullback with low volume → Healthy correction

Signs of weakening uptrend:

Price ↑ but Volume ↓ → Weak trend, risk of reversal

b. Volume in Downtrends

In downtrends, high volume indicates strong selling pressure.

Strong downtrend signals:

Price ↓ and Volume ↑ → Strong bearish trend

Pullback with low volume → Continuation likely

Weak downtrend signals:

Price ↓ but Volume ↓ → Bear trend losing strength

c. Volume in Ranging Markets

In sideways markets, volume generally remains low. A sudden volume spike during range breakout signals trend formation.

4. How to Use Volume for Trading – Practical Techniques
Technique 1: Volume Breakout Trading

Breakouts are powerful signals but also come with fake moves. Volume confirms the authenticity.

Bullish breakout confirmation:

Price breaks resistance

Volume rises above average

Candle closes above breakout level

Bearish breakout confirmation:

Price breaks support

Volume spikes downward

Close is below the support level

Without volume confirmation, breakouts often fail and trap traders.

Technique 2: Volume Divergence

Divergence occurs when price and volume move opposite.

Examples:

Price making higher highs but volume making lower highs → Bullish trend weakening

Price making lower lows but volume decreasing → Bearish trend weakening

Such divergence often signals trend reversal.

Technique 3: Volume Spike Analysis

Sudden large volume spikes can mean:

A big player entering or exiting a position

Market turning point

Start of strong trend

At market bottoms, huge buying volume often appears. At tops, big selling volume may signal reversal.

Technique 4: Using Volume with Indicators

Some popular volume-based indicators:

a. Volume Moving Average (VMA)

Shows average volume to identify when current volume is unusually high or low.

b. On-Balance Volume (OBV)

Adds volume on up days, subtracts on down days to show accumulation/distribution.

c. Volume Weighted Average Price (VWAP)

Used by institutional traders; shows average price weighted by volume.

d. Money Flow Index (MFI)

Combines price and volume to detect overbought/oversold zones.

Using these indicators with price action increases trading accuracy.

5. Volume and Candlestick Patterns

Volume adds strength to candlestick signals.

Examples:

Bullish engulfing with high volume → Strong reversal

Hammer with high volume at support → Buyers entering

Doji with high volume → Indecision among big players

Volume validates candlestick reliability.

6. Volume and Support/Resistance Levels

Support and resistance zones are crucial. Volume helps confirm their strength.

At Support:

Price touches support with low volume → Support likely to hold

Price breaks support with high volume → Strong breakdown

At Resistance:

Price hits resistance with low volume → Resistance holding

Breaks resistance with high volume → Breakout confirmed

Volume acts as the deciding factor in whether levels hold or break.

7. How Smart Money Uses Volume

Institutional traders use volume to accumulate or distribute positions quietly.

Accumulation phase:

Price stays in range

Volume gradually increases

No big price movement

This indicates smart money buying.

Distribution phase:

Price stops rising

Volume spikes at peaks

Smart money selling to retail traders

Recognizing these phases helps traders identify big trends early.

8. Common Mistakes Traders Make with Volume
a. Believing every volume spike means breakout

Volume should be analyzed with price action, not in isolation.

b. Ignoring trend context

High volume in a range is meaningless unless combined with price breakout.

c. Misreading low-volume pullbacks

These are actually healthy for trends, not signs of weakness.

d. Trading without confirming volume

Entering trades based on price alone increases risk.

9. Best Practices for Volume Trading

Compare volume with average volume, not previous candles

Combine volume with trendlines, levels, and patterns

Avoid trading false breakouts without volume confirmation

Watch volume at key supports/resistances

Use volume indicators only as a supplement

Focus on multi-timeframe volume behavior

These practices significantly improve trading accuracy.

Conclusion

Trading with volume gives traders an edge by revealing the hidden strength behind price movements. Volume confirms trends, validates breakouts, identifies reversals, and exposes the actions of big players. When used correctly with price action, support/resistance, and technical indicators, volume becomes one of the most reliable tools in trading. For both beginners and advanced traders, mastering volume analysis is essential for smart, confident, and profitable trading decisions.