How to use Volume in trading
Volume is one of the most popular indicators because it gives you a deeper insight into the candles by showing you the strength of each move. If you learn to read volume correctly, it can improve your win rate by keeping you away from losing trades. In this article, you will learn what volume is and how you can use it in your own trading.
What is volume?
The volume shows the number of transactions made in a certain period of time with a certain financial instrument. The most common way to see the volume in the charts is to activate the volume indicator. It is then displayed as a bar chart under the candles. Each bar belongs to a candle and represents the volume from the opening to the closure of the candle. However, there are many other ways to display volume with different indicators. Some other popular volume indicators are On Balance Volume (OBV), Klinger Oscillator or the Money Flow Index.
Why is it important?
Based on the volume, you can read the strength of a candle, and this helps you to see if, for example, a breakout is valid or not. It is very useful when you use it as a confirmation for your trades. It is also important to understand that volume is closely related to liquidity. When the volume is high, there is also a lot of liquidity in the market. This means that if you are trading small stocks like penny stocks or small cryptocurrencies, you should always make sure that there is enough volume and therefore liquidity in the market. Otherwise, you will have problems finding a counterparty for your positions and will not be able to open or close your trades.
How to use volume in trading
When the price enters your zone (supply/demand or support/resistance), you can determine from the volume whether the price will respect and reject the zone or whether it is about to break through it. In general, you can say that when the volume is high, rejection is likely and when the volume is low, price is likely to break the zone. As always in trading, this is just an indication to help you increase the probability of winning the trade. No one can predict the market, and no rule or system works for every trade. Even though volume is a very powerful tool, it is not easy to read. Take your time and backtest it to find out how it works best for you.
Marco Mullano