The first steps in understanding volume analysis and how it leads to price

Basically, volume is a measuring instrument that reflects the overall performance of an instrument based on the number of buyers and sellers in the market. In other words, volume reflects the desire of buyers or sellers over a period of time, as well as the liquidity of the instrument. Although volume can be shown differently in charts, it is usually shown as a single, undirected, histogram showing the total number of buyers and sellers for a given period. Non-directional means that as the price goes higher or lower, the volume bars will usually reach new heights.

Typical volume metrics represent the total number of buyers or sellers for each particular bar. A trader can look at such a volume representation to assess the liquidity of an instrument. This tells him whether he has enough activity to easily enter or leave a position.

Volume levels can also be displayed as Volume Up (buyers) or Volume Reduction (sellers). This type of volume bar shows the sound displayed as two separate indicators, Volume Up (green histogram bars) and Volume Reduction (red histogram bars). By showing the volume in this way, the trader can compare the purchase volume with the sales volume for a certain period of time.

By comparing two-dimensional screens, a trader can assess whether there is more enthusiasm shown by buyers or sellers over a period of time. In the growing trend, buyers need to be more enthusiastic than sellers. When the market peaks, buyers will lose interest and sellers will take over. In the downtrend, sellers need to be more enthusiastic than buyers. Below, sellers will be discouraged and buyers will take over.

The biggest challenge for new traders when learning volume is to identify these specific patterns – or the volume difference as referenced. The first step is simple – to understand the difference in volume.

The difference in volume is that the price goes in one direction and the volume goes in the opposite direction. For example, there are several types of volume differences detected when using a non-directional sound indicator (all volume histogram bars are built above the zero line):

  • The price reaches a higher level
    • The volume is low altitudes
  • The price is equal heights
    • Delivers volume to higher levels
  • The price goes down
    • The volume makes higher descents
  • The price falls equally
    • The volume makes higher descents

Once the volume difference is determined, the trader can expect an immediate short-term return. For example, when a volume difference occurs at high levels, the trader will wait for a return to test for sellers. Sellers need to be interested in reversing the price and creating a downward trend. If there is no interest, then the price will continue in its original way.

As with most other trading indicators, volume can be as complex or simple as the trader chooses to do it. Today, there are many types of volume indicators. Some are based on the average of real transactions of buyers against sellers over a period of time. Others are based on order flow, measuring buyers and sellers from the actual order flow. Some are more complex than others and do not have a magic volume indicator. The effectiveness of a volume indicator depends more on the trader’s ability to understand and interpret the volume at any given time than the indicator itself.