Volume: The Basics

Every trade has a buyer and a seller, so volume cannot by itself say which side won; it only counts how much trading occurred. A tall volume bar means many participants were active in that period, which makes the price action more significant whether it rose or fell. Volume is therefore a weighting on price, not a separate signal. The mistake is to read a big volume bar as bullish or bearish on its own, when its meaning depends entirely on what price did alongside it.

A strong move on rising volume suggests broad participation and conviction, because many traders are pushing in the same direction. A move on falling or thin volume suggests the opposite: few participants and a move that may not hold. The classic application is the breakout. A break of resistance on a clear surge of volume is more likely to stick than the same break on quiet volume, where the move is more easily faded. Volume does not confirm direction, but it gauges how much weight to give the move.

Volume is most useful on centralised markets such as futures and stocks, where the reported figure reflects the whole market. On decentralised markets such as spot foreign exchange, the volume on your chart is only your broker's slice and can mislead. Volume also has daily and weekly seasonality: the open and close are naturally busier than midday, and holidays are thin. Read volume relative to its own recent normal for that time of day, not as an absolute number, and be sceptical of it where the data is only a fragment of the market.