Volume analysis is an important tool in a trader’s arsenal, but it requires a deep understanding of how to interpret volume dynamics in relation to price.
If you are a beginner trader and have not yet tried volume analysis, this article will help you decide whether you should study it (spoiler: definitely yes).
Beginning traders usually analyze the market in two dimensions: price and time. They can mark different things on a chart that displays price changes over a certain period of time, for example:
But by adding a volume indicator to the existing data (usually it is displayed at the bottom of the chart in the form of a histogram), you get the opportunity to analyze the market in three dimensions: time, price and trading volume.
After adding volumes, you gain an unequivocal advantage — an additional source of information. However, there is also a downside, because more information means more workload — an additional factor that can lead to making the wrong decision.
Should you then add volume analysis to your strategy?
When you use volumes, you work with supply and demand. In the screenshot below, you will find a graphical representation of the supply and demand law. These curves are expressed in terms of the price P and the quantity of goods Q (which represents the trading volume).
By analyzing the volume dynamics in relation to price and time, you form your own opinion on which force dominates the market – demand or supply.
It is believed that in a bull market:
The opposite is true for a bear market:
However, it is important to note that high volumes usually appear during market reversals. In this case, the previous rules work, but if the price rises on excessively high volumes (twice the average), this may be a sign of the culmination of a growing trend. If the price falls on excessively high volumes, this can be a panic and a sign of the culmination of a downtrend.
A simple example. Let’s take a closer look at the chart below — the daily period, the S&P 500 futures market, August 2023.
Numbers indicate:
Another example. This time euro futures, also a daily chart.
Numbers indicate:
Thanks to volume analysis, you can gain insight into the changing balance of supply and demand without delay in order to make informed decisions. Before signals are received from classic RSI, CCI or moving average indicators.
It is worth mentioning separately that a volume indicator is not a magic wand that provides guaranteed accurate profitable signals in any market. There are no such holy grails.
Download ATAS. Launch the platform. Open the chart (Chart module in the main window) and select the tool you are interested in.
Press Ctrl+I or click on the corresponding icon on the top panel of the module — in the indicator manager window that opens, add the indicator to the chart by clicking the Add button.
Example 1. Below is a cluster chart. To switch to the footprint (cluster chart) mode, press Shift+K, or drag the timeline with the mouse. Bright white colors indicate high volume within each candle.
The following things have been added to the chart:
All indicators have many options for customization in terms of colors, modes, timeframe and other parameters.
Example 2. Below is a line chart with a heat map based on large levels in the DOM.
The following things have been added to the chart:
The examples provided above illustrate how volume analysis can improve your market assessment.
Download Free Trial ATAS. It is free. You will get full access to the platform’s tools during your free trial and will be able to appreciate all their benefits in order to make a purchase decision. Moreover, you will be able to continue using the program even after the 14-day trial period is over, but only for cryptocurrency trading.
And then follow these steps:
Here are some tips for beginners:
Trading is a highly competitive business, where easy money is nonexistent. Therefore, if you are willing to put in the effort to gain a competitive edge, volume analysis brings more benefits than drawbacks.
To enhance your trading skills, we recommend paying proper attention to understanding the dynamics between price and volume, based on the fundamental law of supply and demand.
ATAS provides powerful and user-friendly tools for effective volume analysis. These tools can serve various purposes, like tracking the behavior of “smart money” for trading in sync with it.
You can practice interpreting patterns in price and volume behavior using the Market Replay simulator of the ATAS platform.
That ATAS platform:
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Information in this article cannot be perceived as a call for investing or buying/selling of any asset on the exchange. All situations, discussed in the article, are provided with the purpose of getting acquainted with the functionality and advantages of the ATAS platform.
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