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Volume - Indicator Formula
Trading volume refers to the total number of shares, contracts, bonds, commodities, or other financial assets bought and sold over a given time frame. Similar to tracking how many shoppers enter a store, volume provides insight into how active a market is.
Many traders rely on trading volume to evaluate the strength and reliability of price movements. Here are several common ways volume is used:
Validating a trend: When prices move higher or lower alongside strong trading volume, it often indicates broad participation from market participants, making the trend appear more dependable.
Spotting potential reversals: If prices continue moving in the same direction while trading volume gradually declines, it may suggest that momentum is fading and the current trend could be nearing an end.
Evaluating breakouts: Volume plays an important role when prices move above resistance, below support, or out of established chart patterns. A breakout accompanied by heavy volume is generally viewed as more convincing because it reflects stronger buying or selling interest. In contrast, a breakout with light volume may be less reliable and has a greater chance of failing.
Watching for volume surges: Sharp increases in trading volume can sometimes precede significant price swings or indicate that market sentiment is beginning to change.
