Volumes in stock trading and their impact on the trend
Exchange trading volumes play a huge role in trading; they help traders determine trends and traders' interest in a particular asset.
What is exchange volume?
In a market, volume is a measure of how many assets (currencies, stocks, commodities) are bought or sold over a given period of time.
Today, there are many indicators that can help you analyze the market situation and determine the strength of the current trend.
Volume indicators show the total amount of transactions that were concluded on the exchange over a certain time period; such scripts are one of the most popular trading platform tools.
Traders are used to trusting volumes
In most cases, professional traders participate in stronger movements and do not participate in movements that show market weakness; this approach does not always give a hundred percent result and requires additional entry signals.
In a rapidly rising, bull market, there will be an increase in volume and an influx of money into the market for further trading to push the price even higher. But as soon as the volume decreases, it will show a drop in interest, which will be a warning of a high probability of a reversal.
A similar situation can be observed in a bear market, only in this case there is a sharp increase in the number of short transactions.
It should be noted that an increase or decrease in price with a small volume is not a strong signal; only an increase or decrease in price in combination with an increase in trading volume indicates a new trend.
Using the volume indicator in practice
In practice, volume is usually used to solve problems such as identifying a trend, price reversals and confirming price breakouts.
Confirm a new trend
As mentioned above, the volume function can be a secondary indicator that provides information to confirm price trends, but the indicator itself does not provide trading signals. On the charts you can often observe when, during a good trend, a drop in volumes occurs:
The best results when determining a trend are obtained by using volumes in combination with other popular trend indicators. You can also use the favorite Stochastic indicator .
The trading strategy is as simple as possible
An increase in volume when the price rises confirms an upward trend; a trade can be opened if the established trend indicators also give buy signals.
When trading volumes decrease, you should be prepared to close your existing buy position and move your stop loss closer to the current price. Closing occurs as soon as the price stops rising and begins to decline.
Confirmed trend reversal
Another property of volume is that when volume peaks, selling pressure on the market begins to subside.
In this case, there can be two scenarios for the development of events:
When the volume reaches its peak and the price growth slows down, we can conclude that the buyers’ strength has been exhausted, and the price will soon begin to fall.
Conversely, in a downward trend, when the volume is at its maximum and the price stops falling, you should expect a reversal soon and the beginning of an upward trend.
If there is a sharp increase in volumes and price recovery, and then volumes fall again, this behavior may indicate a weakening trend.
Confirmation of a breakout through an increase in volumes
The chart often contains important price levels, on the basis of which support and resistance lines , volume is an important sign in confirming price breakouts.
If during a breakout of the level there is a sharp increase in volumes, then this can serve as confirmation that the breakout is not false. When, after overcoming an important price level, there is no increase in volumes, this fact indicates that the price was unable to leave the price corridor and the breakdown is false.
In conclusion, we can conclude that exchange volumes are excellent indicators of trend confirmation, determining the minimum or maximum price and checking the breakout of the level.
By skillfully combining volumes with other trend indicators, it is quite possible to raise the performance of your transactions to a new level.
Another advantage of using indicators such as Volumes is their ease of use, which makes them easy to use in their strategies even for novice traders.