Volumetric Analysis is one of the most widely used techniques by experienced traders to gain a deeper understanding of market behavior. It is based on observing traded volumes and their distribution over time and price. We discuss it here: we will see what advantages it can offer compared to traditional technical analysis, how it is concretely realized, and what are the most common mistakes to avoid.
What is Volumetric Analysis
Volumetric analysis is a methodology that studies the volume of trades in relation to price and time. It does not merely consider how much has been traded, but also observes where, when, and how the trade occurred. The goal is to identify areas of interest from institutional traders, accumulations and distributions, and potential trend reversals or continuations.
This technique does not replace classical technical analysis, let's be clear, but it integrates it with more specific data on the actual activity of market operators. Unlike the simple "volume indicator" visible on many platforms, volumetric analysis makes use of advanced tools such as
Volume Profile, Footprint Chart, and Delta Volume, which allow for a more precise reading of the market structure.
But here are all the applications of volumetric analysis.
- Identify key price levels. Volumetric analysis helps identify zones of high trading activity (high volume nodes), often coinciding with supports or resistances.
- Assess the strength of a movement. Volumetric analysis allows understanding whether a trend is solid or not, particularly by associating price movements with volume movements.
- Monitor accumulation or distribution areas. When volumes increase in a sideways phase, it is likely that there are operators building or dismantling significant positions.
- Anticipate potential reversals or breakouts. The break of a low volume area (low volume node) can indicate a directional acceleration of the market.
- Confirm price action. Volumetric analysis provides further confirmation to price patterns observed on classic charts.
How to Perform Volumetric Analysis
To perform volumetric analysis, it is necessary to have a platform that supports advanced volume data, such as those derived from level 2 of the trading book or from tick-by-tick data. But here are the steps to follow.
- Importing volume data. Volumes must be of high quality. In the Forex market, for example, proxies such as currency futures data (e.g., CME) are often used because Forex does not have a centralized market.
- Choosing the display type. Traders can choose between different modes: Volume Profile (shows the distribution of volumes per price level), Footprint Chart (highlights bid and ask volumes within each candle), Delta Volume (indicates the difference between buy and sell volumes).
- Contextual analysis. Volumes are observed in relation to price behavior. For example, an increase in volumes in a restricted area may indicate a congestion area, while a low volume area may represent an area of low interest or potential acceleration.
But let's make a practical example.
Suppose we observe EUR-USD with a daily Volume Profile. We notice that the point of control (POC), i.e., the level with the highest traded volume, is at 1.0840. This level assumes operational relevance. If the price approaches 1.0840 from below,
with increasing volumes, we can hypothesize that the market is testing an important area and wait for signals for a potential rebound or breakout.
Mistakes to Avoid
Volumetric analysis offers valuable information, as we have seen, but it can be misleading if used improperly. Therefore, it is necessary to avoid some incorrect practices that can compromise the interpretation of the data.
- Using unreliable data. Many traders use platforms that do not provide real volumetric data, especially in Forex. Using simulated or partial volumes can lead to erroneous conclusions.
- Neglecting the time context. Volume only makes sense if analyzed in the right time context. A volume spike on a 1-minute chart can have a very different meaning than a spike on a daily basis. It is essential to harmonize the operational timeframe with the volumetric analysis.
- Ignoring price behavior. Volume is not an isolated indicator. It must be read in relation to price. A strong increase in volumes with a stable price may indicate accumulation; the same increase with a strong directional movement may instead indicate a breakout. Basically, the reading must always be integrated.
- Blindly trusting high volume levels. Not all levels with high volume are turning points. Sometimes they represent areas where the price has simply lingered for a long time. It is necessary to distinguish between passive volumes (accumulation) and aggressive volumes (strong executions).
- Overloading the chart with too many tools. A common mistake is to combine too many volumetric and technical indicators on the same chart. This can generate confusion. The advice is to work with a few clear and well-interpreted tools, rather than with a lot of overlapping information.
- Not testing the strategy on historical data. Even if volumetric analysis is often used in a discretionary way, it is useful to test the most recurring patterns on past data. This helps to understand the reliability of one's interpretations.
