Hello friends. In the financial markets, people are
increasingly trading stocks, bonds, commodities, currencies, and other
financial instruments. Our goal is the same, which is to make profits in the
financial markets through successful trading. To do this, we need to correctly
predict market movements. In this undertaking, technical indicators, which are
a part of technical analysis, assist us. Technical indicators are very
important tools for analyzing price movements and identifying trends, support and resistance levels, volume, and other factors. One of these technical
indicators we will now discuss is the Volume indicator.
What is the Volume indicator?
The Volume indicator is one of the more preferred tools in
technical analysis when it comes to trading in financial markets. This
indicator displays the trading volume or the amount of transactions of a
financial asset within a specified time frame. It is usually used across
different asset classes such as currencies, stocks, bonds, commodities, and
other financial instruments. The Volume indicator provides insights into the
strength and direction of the market by examining trading volume alongside
price movements. It is particularly useful for confirming price movements and
identifying trends. High volume indicates a strong trend that is likely to
continue, while low volume indicates a weak trend that is likely to reverse.
This helps us gain valuable support in better understanding price movements and
making more better trading decisions.
Calculation and formula of the Volume indicator
The Volume indicator is a technical indicator that measures
the volume of trades that occur over a given time period. It is calculated
using a simple formula:
Volume = Number of Trades x Size of Each Trade
In this formula:
- "Number of Trades" represents the total number of trading transactions that occur over a given time period.
- "Size of Each Trade" represents the amount of each of these transactions.
Now, let's observe a daily stock chart. To calculate the
total volume of stock trades that occurred over the course of a day, we sum up
the trade quantity for each trade that took place during that day. This
information helps us determine the total trading volume for that day. For
example, if a stock traded 100 lots at a price of $10 each, the volume would be
$1,000.
To calculate the Volume indicator, we typically sum up the
trading volume for a specific time frame for various financial assets. This is
often done on intraday charts (1 minute, 5 minutes, hourly) or longer-term
charts (daily, weekly, monthly).
Using the Volume indicator in trading
The Volume indicator can represent the volume of trades over
a given time period using different chart types, such as line charts,
histograms, or bar charts. This indicator helps us to analyze the relationship
between price movements and volume and to understand market trends. We can
trade in financial markets using the Volume indicator as follows:
Trend Following. We can use the volume indicator to
determine the strength of trends and the probability of their continuation.
During a period of rising prices, high volume suggests that the upward movement
may be strong, indicating the current trend will continue. In this case, we can
place a Buy order. During a period of falling prices, high volume indicates
that selling pressure is increasing, signaling the continuation of the
downtrend. In this situation, we place a Sell order. An example of this can be
seen in the daily chart of AIR FRANCE stock. In a situation where the price of
AIR FRANCE stock is rising and the volume is increasing, the uptrend is strong
and continues. Similarly, in the same chart, when the price is falling and the
volume is increasing, the downtrend is strengthening and continues:
 |
| Tracking trends with Volume indicator on Air France stock chart |
Consolidation Trading. The volume indicator can be
used to determine the strength of buyers and sellers during price
consolidation. In a situation where a stock price is consolidating within a
narrow range and the volume is low, we can say that the balance of power
between buyers and sellers is relatively equal. This indicates that the price
may be poised to move in either direction. We can see a clear example of this
on the weekly chart of SINGAPORE AIRLINES stock in the context of trading:
 |
| Singapore Airlines stock consolidates on low volume |
Divergences. Divergences between price movement and
volume can be an indicator of a possible reversal or a short-term pullback. For
example, if prices are falling while volume is increasing, it suggests that the
downward movement may weaken. Conversely, if prices are rising while volume is
decreasing, it indicates that the uptrend may weaken. An example can be seen in
the 4-hour chart of TURKISH AIRLINES stock, where prices are rising but the
volume is not supporting this rise, ultimately resulting in a price decline:
 |
| Divergence between price and volume in Turkish Airlines stock chart |
Please remember that the volume indicator is a valuable tool that can help us better understand price movements. However, it can also be misleading when used on its own. When trading in financial markets, we should use Volume indicators together with price movements, fundamental analysis, and risk management, and always keep an eye on the market.