How to trade with the stock market volume indicator?

If you are new to trading, the volume indicator is a stock market tool that should not be neglected. It happens that you are surprised by a strong fluctuation of a financial asset and touched by a stop loss. As a result, you have a losing trade and your trading capital decreases. Sometimes, unfortunately, it is difficult for a novice trader to understand why he has suffered losses.

After reading this article, you will learn:

• All about how volumes work in trading.
• How to analyze a stock market indicator to make a trading plan.
• Use this technical tool to find trading signals.

So don't wait any longer and you will enrich your knowledge to increase the number of winning trades.

You can also sign up for a FREE trading training to start trading the futures markets with confidence.

All About Trading Volumes

Indicating volumes on the exchange It is very interesting to know the behavior of traders and investors. We will see how the volume indicator works to help you improve your technical analysis of financial markets. Moreover, once you have a good understanding of this technical indicator, you will be able to develop a trading strategy with this indicator in mind.

Analysis of trading volumes for the underlying instrument is very useful in preventing false trading signals. We will see how to do a good chart analysis with the volume indicator. This will become an additional weapon for the growth of your trading account.

With these additional tools, you can become a profitable independent trader. We have a complete guide on how to become a private trader.

How the trading volume indicator works

The price of the underlying asset is determined by consensus between buyers and sellers. Volume reflects the attitude of traders or investors towards this underlying asset. Similar to the RSI indicator, the volume indicator gives investors the feeling of buying or selling based on the number of transactions in an asset.

Then you have a reflection of the strength of an uptrend or a downtrend in the price of a stock due to the psychology of traders. Indirectly, you have an idea of the volatility of a listed stock, an index (DAX, CAC, Nasdaq, etc.), a cryptocurrency (Bitcoin, Ethereum...) or a currency such as the EUR/USD exchange rate.

This is a very interesting additional information, because then you will have a global view of the market or even a sector of activity, because you can report between several companies if you trade stocks of the stock market.

Understanding the stock market volume indicator

The volume indicator is a very powerful tool, but it is often neglected. At the same time, it is simple in its understanding and interpretation. Volume tool in technical analysis is an indicator of the number of trades made in a certain period of time. Indeed, each candle is set to measure volume in units of time.

Green candle indicates buy volume and red candle indicates sell volume. The larger the volume histogram, the greater the trading volume for the asset.

In addition, this indicator is very useful for determining the risk you can take on your capital. Similarly, it can help you increase profits from your trades.

On our YouTube channel you will find our video on approach to trading, not volume.

Analysis of trading volumes on the stock exchange

Depending on units of time, there is a volume of transactions between buyers and sellers. Remember that there is a volume histogram for each candle following the unit of time on the stock chart. However, you can have a very high volume histogram in green with a green candle, but in the shape of an inverted hammer.

You are viewing trading activity between buying and selling by any market operator. Of course, it is mainly large investors such as hedge funds, investment banks and institutions that create most of the volume. But you will also find small carriers and independent traders.

In short, these are all the daily traded contracts you see on this technical indicator. Price and volume analysis provides a base of information to begin charting an asset. Contrary to what one might think, the volume indicator contains no less information than other momentum indicators for studying the behavior of financial securities.

Analysis and entry into a position with a volume indicator

Now that you know how to analyze volumes of the underlying asset, we will do a detailed analysis to draw up a trading plan. We have seen that lack of trading volume in the stock market can lead to false buy signals and false sell signals. Indeed, if you don't have volume, you don't have enough flow.

On the contrary, if the candle is bullish or bearish with heavy volume, there may be big bullish or bearish moves. We are going to detail this concept because high volume is not synonymous with an impulsive candle.

We have an article discussing the best time to trade in the stock market.

Correct interpretation of trading volume

Typically you have two scenarios for interpreting trading volumes. First, if you see a gradual decrease in trading volumes during an uptrend, this is often a sign that a short uptrend is fizzling out. It may be time to lighten your position in the markets so that you are less exposed to them. You can also compare the volume indicator with the RSI. You will definitely see a bearish divergence there. The correlation of two technical indicators confirms that a trend reversal may occur.

To learn all about RSI, we have a complete article about this technical indicator.

Another very interesting case is an increase in the volume of transactions without a significant increase in the share price. This can be interpreted as an accumulation phase. In other words, you have a growing volume between buyers and sellers. All it takes is a very high volume histogram for an impulsive candle to appear and give you a buy signal.

Similarly, you can draw a trend line at the top of the histogram. When you have a breakout of this trend line, materialized by high trading volume, it can also be a buy signal to enter the market.

Volume profile integration to create a trading plan

Another very useful volume indicator for technical analysis is the volume profile integration. This indicator allows you to view historically the number of trades made at a certain price. The longer you trade at a certain price, the more psychological the price of an asset is for the market.

Histograms are placed horizontally on a stock chart. So you have psychological prices that show potential areas of support or resistance for price. Indeed, we can also interpret that in the case of a bearish price phase, an area where the volume profile is important can act as support. Therefore, investors will not allow sellers to continue the downtrend. We can conclude that there will be conditional buy orders at these levels to initiate a downtrend reversal.

We have a very detailed video explaining the volume profile indicator in the futures markets.

Searching for a trading signal using the volume indicator

As mentioned above, finding a signal with the volume indicator will correlate with various technical analysis tools. Chartism and knowledge of Japanese candlesticks are needed here. Optionally add an additional momentum indicator if you need confirmation.

By drawing trend lines on the volume indicator histograms, you can observe breakouts of these lines. According to the breakouts of the downtrend lines on the underlying asset you are trading, you will have a fairly clear buy signal to enter the position.

The volume indicator is a tool that allows you to know the buying or selling power of investors

Now you know that the volume indicator is a very good tool for predicting movements in financial markets. A large volume of trading in stocks, stock market indices or forex currencies can be a harbinger of a bullish or bearish trend. With your technical analysis and fundamental analysis of the markets, you will be able to predict and clearly see technical signals for buying or selling stocks.

In the futures markets, the combination of an order book and a market profile can provide much more detail when preparing your trading plan.

We have a trade training that is perfect for learning these two technical tools. They are used by leading professional traders. By completing the PERFORMER training, you can become a profitable private trader. You will learn from the experience of our trainers and our traders who have over 15 years of experience.

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Paul Roberts

Paul Roberts 51 years old Born in Edinburgh. Married. Studied at University of Oxford, Department of Public Policy and Social Work. Graduated in 1997. Works at Standard Life Aberdeen plc.

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