Trading Volume: The Key Signal to Understanding Buying and Selling Pressure

When discussing financial market analysis, attention is often solely focused on price, as if it were the only element to consider. While price represents the final result between supply and demand, another fundamental element is often overlooked: trading volume. Volume can provide valuable indications about market participation, the potential entry of large investors, and possible trend reversals. In this article, we will explore this topic in depth, reviewing the reasons why volume is important, how to recognize volume spikes, what tools and indicators exist to analyze it, and finally, how to translate this information into concrete trading strategies.

Why Volume Is Important in Trading

Volume represents the number of contracts or securities traded over a given period. When observing a chart, the focus is often on price movement: rises, falls, support, resistance, candlestick patterns, moving averages, and so on. However, every price variation is the result of actual buying and selling, and this "market movement" clearly manifests through volume. Ignoring it means giving up a tool that can offer crucial indications. But here, in detail, is why volume is important:

Measures Market Participation

If the price moves but volume is low, we might be facing a fake breakout or a movement "manipulated" by a few operators. Conversely, if the price remains in a range but volume increases significantly, accumulation or distribution by institutional investors could be underway.

Provides Signals of Confirmation or Divergence

A breakout of a technical resistance accompanied by a strong increase in volume is much more credible than a breakout with inconsistent volumes. In this case, high volume confirms the interest of operators in supporting that movement. On the contrary, a selling price with decreasing volumes could signal upcoming weakness.

Can Anticipate a Reversal

When institutional traders (funds, investment banks, etc.) start entering or exiting significant positions, volume tends to increase substantially. Even if the price may not immediately show a clear reversal, the increase in volume often precedes or accompanies the most important trend changes.

Helps Assess Market Liquidity

In markets with high volumes, positions can be opened and closed more easily and with tighter spreads between bid and ask. This reduces transaction costs and the probability of slippage (price difference between the order and the actual execution). For novice traders, understanding from the outset how volume works means gaining a competitive advantage in interpreting the chart. It is not a "miraculous" indicator, but an essential variable to add depth to technical analysis, beyond simply reading prices.

How to Interpret Volume

More often than not, volume interpretation consists of detecting possible peaks, the so-called spikes. This term refers to moments when the number of securities or contracts traded in a single time interval (daily, hourly, 5-minute candle, etc.) increases significantly compared to the average of the previous bars. Here, then, is what evidence to draw from volume in general and spikes in particular:

Spikes in Breakout Situations

When a price breaks a key resistance or support, if this happens with a spike, it is more likely that the breakout movement is authentic. This is because anomalous volume suggests broad market participation, including the so-called "strong hands" (institutional or large-capital investors). If, on the other hand, the breakout occurs with volumes well below average, it could be a temporary break, destined to retrace.

Spikes in Reversal Phase

A strong increase in volume during an attempted trend reversal can signal that the market is changing direction. For example, in a prolonged downtrend, if the price suddenly reverses course with a very high spike, it could suggest that sellers are losing ground and a new wave of buying is about to occur. The same goes for an uptrend, but in reverse: if a bearish candle encounters a spike, it is likely that buyers have lost their propulsive strength.

Divergence Between Price and Volume

Sometimes there is a divergence between price and volume: the former continues to rise, but the latter is decreasing. But the opposite can also happen: the price continues to fall but with lower volumes. What to make of these divergences? Simply put, the trend may have exhausted itself. This evidence is especially useful for more daring traders who want to play ahead.

False Spikes

Not all spikes are buy or sell signals. There are situations (especially in markets with low liquidity) where a few large transactions or the entry of a single big player can temporarily inflate volumes. For this reason, it is important to always contextualize the volume anomaly with the technical price context and the market timing in which it occurs. Events such as market openings or closures, the publication of macroeconomic data or corporate earnings can significantly impact volumes.

Tools and Indicators for Volume Analysis

Let's now move on to an overview of the most common tools and indicators used to analyze volume. Each of these can offer a different perspective on the structure of trades and the possible intentions of market operators.

Volume Profile

The Volume Profile doesn't just show the total trades over time, but distributes it along the price axis, highlighting the price levels where the highest number of transactions were concentrated. It is a sort of horizontal "map" that shows at which prices the market has been most active. Therefore, it can help identify the most significant support or resistance zones, often corresponding to the so-called "Points of Control", points where most traders have opened or closed positions.

On-Balance Volume (OBV)

OBV is a cumulative indicator that adds or subtracts daily volume (or the chosen timeframe) to a total value, based on the direction of the price movement. If the selling price increases in a candle, the volume is added; if it decreases, it is subtracted. By comparing the OBV trend with the price trend, divergences can be detected: for example, if the price moves upwards but the OBV does not confirm the movement, it means that volumes are not "supporting" the rise.

Money Flow Index (MFI)

Similar to the RSI (Relative Strength Index), but based on volume as well as price. The MFI seeks to quantify the flow of money entering and exiting a security by combining price and volume changes. When the MFI reaches overbought levels (usually above 80) or oversold levels (usually below 20) in conjunction with decisive price movements, it may signal a possible exhaustion of the current trend.

Volume-Weighted Average Price (VWAP)

Although the VWAP is not a "pure" volume indicator, it proves very useful for exploiting volumes themselves. Basically, it represents the volume-weighted average price. It is often used by institutional traders to assess the quality of executions: buying below the VWAP means, in theory, acquiring a better price than the volume-weighted market average. But it is in day trading that the VWAP takes on its most unique form. In this case, it can act as dynamic support or resistance, as many traders use it as a reference point.