Volume analysis is a type of technical analysis that focuses on the interaction between the price of a financial asset and the volumes of executed trades. Volume analysis is an effective approach for predicting price movements. It is based on studying the forces of demand and supply, the drivers (causes) of quotes’ increases and decreases.
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Trading volume is the amount of financial assets bought or sold during a specific period.
Trading volume is recorded by the exchange.
Example. On the Nasdaq exchange website, alongside other information, trading volume data for AAPL shares is published.
Volume analysis on the stock exchange is a method that enables traders and investors to assess market participants’ activity and identify potential trends. Volume analysis is based on the law of supply and demand — the price of an asset rises when demand exceeds supply and falls when supply exceeds demand.
Looking at the graphical interpretation of the law of supply and demand, the axes represent:
Volume analysis helps evaluate which force dominates in the market — buyers or sellers. Or they are in temporary equilibrium.
When the balance of supply and demand is disrupted, the price changes. By skillfully analyzing volumes, a trader can timely receive signals about these changes.
Useful tip: We recommend reading a series of articles on VSA and cluster analysis because Volume Spread Analysis is based on the logic of the law of supply and demand. The first article in the series: Bag Holding and End of Rising Market Patterns.
Overall, volume analysis is a powerful tool that helps many traders and investors improve their trading results. For more details on this topic, read an article on the pros and cons of volume analysis.
Analyzing volumes on the ATAS platform, you can work with various types of volumes:
Useful links: What is Bid, Ask, and Spread?
Volumes can also be categorized into:
We should also mention volumes in the Depth of Market (DOM or Level II). These are limit orders that have not found a counterparty yet. By default, these volumes are displayed on the right side of the price chart. Alternatively, specialized functionality, such as the Smart DOM module, can be used for their analysis.
These are volumes that depict trading activity per timeframe unit.
Example. The chart of E-mini S&P-500 index futures and three indicators for analyzing volumes per timeframe unit, in this case, 30 minutes.
Below the price area, the following elements are included:
Note. To add an indicator on the ATAS platform chart, press Ctrl+I or use the icon in the Chart module menu (shown in the screenshot).
It is generally considered that:
While these observations are generally correct, they require a couple of important additions:
Useful links:
Volumes that depict trading activity at specific levels over a selected period.
Example. You can see the chart of E-mini S&P-500 futures again. But now it is enhanced with a market profile indicator for the daily period. It shows how many contracts were traded per time unit.
The market profile indicator shows:
In our case, numbers show how many contracts were bought/sold at each level within one day.
It is believed that the price may (but not necessarily) react to sharp changes in the profile:
The price’s reaction to the mentioned profile characteristics can be explained by the fact that it touches the interests of those who previously traded at these levels. For example, testing the Point of Control makes numerous position holders to either close positions at breakeven, reduce positions, or add to them.
It is challenging to explain in words, it is better to see for yourself. Download ATAS, add the profile to the chart, and observe the price reaction.
Useful links:
Cluster charts (or footprints) are a way to visualize the trading history on the exchange with the maximum possible detail. With the advancement of technology, ordinary market participants have gained the ability to ‘look inside’ traditional candlesticks of the exchange chart and study how trading unfolded, down to each trade.
Example. A cluster chart of the Euro futures. To activate the cluster mode in ATAS, open the chart and press Shift+K (or stretch the time scale with the mouse). A menu for configuring clusters will appear on the left (indicated by the red arrow).
ATAS provides access to over 400 different variations of cluster charts. In the footprint above, you can see:
Making trading decisions based on footprint charts is not based on the logic of ‘buying because the fast EMA crossed the slow one from below upwards.’ When analyzing cluster charts, focus on understanding the confrontation between buyers and sellers. Pay attention to:
Useful links:
Market Depth (Depth of Market, DOM) is an indicator that displays information about buy and sell orders placed in the market.
This valuable Level II information is broadcasted by the exchange and can be used by traders to identify support and resistance levels.
Market depth analysis is also referred to as order book analysis.
Example. The DOM Levels indicator has been applied to the chart of Nasdaq index futures. It enables the analysis of price behavior at levels where significant volumes (limit buy and sell orders) have been placed.
The indicator helps identify a strong resistance level around 17020. Pay attention to the price behavior:
Similar to other volume analysis methods, analyzing the DOM does not provide signals with 100% accuracy. However, by studying recurring patterns of price reaction to significant volume levels, you can assess the market situation more deeply. It will enable you to make more informed decisions when it comes to opening and closing positions.
Useful links:
Tip. You can combine footprints, market depth indicators, and horizontal and vertical volumes on a single chart. This way, you will gather the maximum of useful information for making well-informed trading decisions. This approach provides you with a competitive edge over other traders.
How to calculate volumes in trading?
You do not need to calculate them. The exchange does that, while indicators and trading platforms provide the information in an easy format for analysis.
What does the volume indicator show in trading?
It can represent the number of bitcoins sold, the quantity of executed trades, or something else.
What is the name of the indicator that shows volumes?
The Volume indicator is commonly used for volume analysis. The Delta indicator is used to analyze volumes with a distinction between buys and sells. The Market Profile indicator is used for analyzing trading volumes at a specific price level.
What do volumes mean in trading?
Volumes convey information about trading activity. By applying the logic of supply and demand, hypotheses can be created. For example:
Study various patterns of price and volume interaction, by doing so, you will be able to get a full picture of changes in supply and demand over time. This allows you to make informed predictions about the chances of the price moving in one direction or another.
You need four components:
The first three components can be found on our website. Here, you can download the ATAS platform – premium-class software for volume analysis.
The benefits of this decision are crystal clear!
A wide range of connections. You can conduct comprehensive volume analysis in stock, futures, and cryptocurrency markets.
A training mode. You can learn to analyze volumes without a broker. Market Replay, a market simulator, reproduces historical data as if trading is happening in real time. Practice trading on the financial market in a simulator without risking real capital!
Educational Materials. Our blog, YouTube channel, and Knowledge Base provide specific instructions on setting up and working with charts, applying indicators, developing strategies, and other valuable information for day trading. Additionally, ATAS platform users can rely on responsive customer support.
A wide range of functionality for volume analysis:
Volume analysis in trading is a methodology for assessing the strength or weakness of the market based on the number of trading operations over a specific period. This analysis helps understand how actively market participants are involved in price movements, providing crucial insights into potential reversals or trend continuations.
On one hand, volume analysis allows for a much more precise evaluation of the market situation. On the other hand, to become proficient in volume analysis, one needs to learn and have specialized software in their toolkit.
Download ATAS. It is free. During the trial period, you will get full access to the platform’s tools to experiment with volume analysis. Moreover, you can continue using the program for free even after the 14-day trial period is over, whether it is for cryptocurrency trading or volume analysis on history.
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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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