There are various indicators you can use to measure volumes with but just how useful is volume and should you care about it? Well, analyzing volumes can tell us about the strength of a trend, reversals, breakouts and it can reveal false breakouts too. These are all important things that you should know before executing a trade. For this reason; learning how to interpret volumes can significantly improve your trading. Here is a short video on Investopedia that explains what volume is.

Basically, volume is the number of shares of a stock, lots of a commodity or ticks of a forex pair that have been traded in a set period.

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This is not to be confused with net movement in a day. For example, Ford may trade over 30 million shares in a day which is not the same as moving up or down by a dollar. There are four types of volume indicator in MT4 but for this we are talking about the simple volume histogram that shows the number of daily shares or tics traded.

As you already know, there are both buyers and sellers in the market that push prices up or down; the volume indicator measures the number of shares traded without regard to buying or selling so for this reason is best used along with other indicators. When an asset is being traded volume is created; for price to move from one price level to another higher than average volume is usually required.

For example; a rising market should also mean a rise in volume if the trend is to continue.

This indicator is usually used on assets other than forex because of the lack of official data in the spot forex arena. The volume you see when you look at a forex chart is actually tick volume as in the number of ticks that a pair has moved during the period, regardless of direction or extent.

The volume indicators works by showing the number of shares of an asset, lots of a future or tics of a forex pair that have been traded during the indicated period. This is useful information because it reveals the amount of, or lack of, conviction in a price movement.

This information can be used to confirm the move through price action and other indicators. There are a couple of main areas where I find volume to be especially useful but confirmation is the best. The way most traders use volume is with an average daily volume. If the average volume over the past 10 days is X and today volume is 2X, 3X or higher then today could be an entry point for trades.

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Monitoring the volume when price of an asset reaches certain support or resistance areas can tell you whether the trend will continue or a reversal will take place. Like I mentioned above; volume is required to move price. In turn, this also means that if a price rises or falls on high volume it has a higher probability of being a longer term movement. Exhaustion moves are also often accompanied by high volume and can be incredibly profitable trading opportunities as well.

As price increases so does volume, indicating a strong trend. In the example above, you could learn two things by studying the volume indicator.

First, that the bullish trend is still in charge and second, the small bearish movements are just retracements. Because the volume is increasing as the trend moves up and those small retracements have lower volumes.

Just like any other indicator, this indicator can give false information and signals as well as good ones. Volume is a cold, heartless indicator and takes no account of direction or trend.

Other than that, you should know that there are different types of indicators based on volume and each have their own drawbacks or advantages. There are several advantages with using volume such as locating reversals, confirming breakouts and identifying the strength of the trend but the very best use is for confirmation of other signals.

Using price action together with Volume is a great way for newbies to start trading.

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It is wise to use volumes with price action and in accordance with trend analysis. If you still have questions about how to take advantage of volume trading and want more examples, visit the forums and be sure to let us know if you have your own way to use this tool. For question regarding brokers — Please use our Forums. Hylton Glass on BigOption.

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