What Is Market Volume?

Market volume is the number of contracts, lots, or shares that change hands over the course of a given period. Also referred to as traded volume or simply as volume, market volume is widely viewed as being a key barometer of participation.

In practice, volume is a product of the interaction between buyers and sellers on the open market. To illustrate the concept of volume:

  • Assume that Trader A purchases one standard lot of EUR/USD on the forex at the best available price
  • Trader A's order is filled at market by sell orders from other traders or liquidity providers
  • The transaction as a whole is counted as one standard lot or 100,000 EUR changing hands

The manner in which volume is accounted for varies according to market and asset class. On the forex, volume is viewed in terms of turnover, or the amount of currency that is changing hands. For equities, it is measured by the number of shares that are bought or sold over a given period of time. In reference to futures and options, volume is the number of contracts that have been bought or sold over a given period of time.

Although volume defines the transaction count in each distinct market, it is important to recognise the nuances involved in reporting.

Volume As An Indicator

Generally speaking, greater volumes are representative of robust participation and intensified market activity. This concept is used to interpret price action in three primary ways:

  1. Trend Strength: Trends in asset pricing that are accompanied by high volumes are deemed to be strong. Accordingly, as volumes decrease, a trend is viewed as weakening and the potential for a market reversal comes into play.
  2. Volatility: During periods of heavy participation, pricing volatility is typically enhanced. Increased order flow contributes to greater traded volumes, and in turn, boosted periodic volatilities.
  3. Liquidity: When volumes are high, markets operate at near-peak liquidity. Accordingly, trading efficiency grows as bid/ask spreads tighten and slippage is reduced. Conversely, when volume is low, market liquidity decreases as does efficiency.

Volume is a key element of many facets of technical analysis. It is used to measure the relative strength of a trend, points of reversal and even project future breakouts from consolidating markets. While volume is not the end-all-be-all technical tool, it is frequently used to complement other indicators and methodologies.

Applying Volume Analysis

Active traders apply volume analysis in a number of ways. Among the most popular is to reference a volume count throughout the trading day to monitor market activity. During periods of exceptionally high or low volumes, strategic considerations pertaining to trade selection and position management are then made.

While an actual count is a frequently used tool, there are numerous methods in which traders integrate volume into their trading approaches. Below are two of the most popular:

  • Histogram: A histogram represents traded volumes in terms of bars. It is commonly utilized as a chart overlay and visually illustrates current and past volume levels.
  • Market Profile Charts: Market profile charts use letters to represent movements in price for defined time periods. The result is a picture of traded volumes at specific price points labeled according to time.

No matter which volume tools are referenced, the data is typically used to identify market state and fine-tune entry/exit points. Countless methodologies incorporate some form of volume analysis, including trend, reversal, breakout and rotational trading strategies.

This page was last updated on 9th January 2020.


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