What is volume trading?

How do experienced traders spot market movements before they happen? One crucial factor in trading is volume, often referred to as the "heartbeat" of the market. But why does trading volume play such a central role in analysing price movements? Whether you're a beginner or have already gained some trading experience, our guide explains what volume trading is, how it works and what volume ultimately means for your trading strategy.

• In volume trading, traders use trading volume to analyse market trends and make informed decisions

• High volume during a breakout or trend often confirms the strength of the movement, which is useful for both short-term and long-term trading

• Indicators like OBV, VWMA and Volume Profile provide insights into volume dynamics and make it easier to analyse stocks and other assets

• With tools like demo accounts, specialised software and stock market chart analysis, beginners can learn volume trading risk-free and develop strategies

Explanation: What is volume trading?

Volume trading is a method where traders use trading volume – the number of units of an asset traded within a specific period – as a key indicator to analyse market behaviour and make better decisions. This trading strategy assumes that volume shows how strong a trend is, how much interest market participants have and in which direction prices might move.

For example, if a stock's price rises while trading volume also increases, it indicates strong market support. On the other hand, if the price falls while volume rises, it could suggest increasing selling pressure. This method is often used alongside other forms of analysis, such as technical analysis.

How does volume trading work?

The mechanics of volume trading are straightforward: trading volume is compared to price movements to identify patterns and signals. Traders observe whether volume aligns with price movements or diverges from them.

A trend is considered strong if volume increases alongside price growth. Conversely, a downtrend with high volume suggests that selling is being supported by many market participants. A divergence, where price rises while volume falls, could indicate a weakening trend.

Additionally, volume plays a key role in analysing trend reversals and breakouts. A significant increase in volume during a price breakout can often confirm that broad market activity is driving the movement. Low volume, however, may suggest that a breakout is unsustainable. Understanding the relationship between volume and price movements helps traders make precise decisions and better interpret market patterns.

What are indicators in volume trading?

Indicators in volume trading are tools that help traders analyse trading volume and price movements more effectively. They translate complex data into visual or numerical signals that are easier to interpret. These indicators show how volume relates to an asset's price development and provide insights into trends, reversals or market strength.

There is a wide range of volume indicators, each highlighting different aspects of the market. Some measure capital flow, while others analyse the ratio of buying to selling volume or show how volume is distributed across certain price levels. Traders often use multiple indicators, such as OBV and VWMA, in combination to link trading volume with price movement and make better-informed decisions. Here, we explain what each volume trading indicator means.

On Balance Volume (OBV)

The On Balance Volume (OBV) indicator helps traders track capital flow into an asset. It calculates cumulative volume by adding the trading volume of days with rising prices and subtracting it from days with falling prices. A rising OBV indicates that capital is flowing into the market, suggesting potential price increases, while a falling OBV signals capital outflows and possible weakness.

Klinger Volume Oscillator (KVO)

The Klinger Volume Oscillator (KVO) helps traders identify long-term trends and short-term turning points in the market. This indicator combines price movements and volume data to represent the balance between buying and selling pressure. Positive values indicate stronger buying pressure, while negative values suggest selling pressure. The KVO is often used to detect early signals of a potential trend reversal.

Accumulation/Distribution Indicator

To assess underlying market strength, the Accumulation/Distribution (A/D) indicator is a useful tool. It links trading volume to the closing price position within the daily trading range. A closing price near the daily high indicates "accumulation," while a closing price near the low signals "distribution." This helps traders determine whether buyers or sellers are dominating the market.

Volume Weighted Moving Average (VWMA)

The Volume Weighted Moving Average (VWMA) considers trading volume in its calculations, giving more weight to periods with high trading activity. This provides a more accurate representation of market activity than simple moving averages. Traders use the VWMA to assess trends and determine whether significant volume is supporting price movements.

Chaikin Money Flow (CMF)

The Chaikin Money Flow (CMF) indicator measures how much capital is actually flowing into or out of the market. It combines volume and price data to generate positive or negative values. Positive values indicate buying pressure, while negative values signal selling pressure. The CMF is commonly used to confirm the strength of an existing trend or detect weaknesses early.

Volume Profile and Volume Indicator

The Volume Profile graphically represents trading volume at different price levels. It shows where significant trading activity occurs and helps traders identify support and resistance levels. Additionally, the general volume indicator provides basic information on trading activity, such as bar charts that display volume per price movement.

Footprint Chart

A particularly detailed tool for volume analysis is the Footprint Chart. It shows how many buy and sell transactions occurred at a specific price level, offering deep insights into market activity. This tool is especially useful for understanding supply and demand dynamics at a micro level and making well-informed trading decisions.

How to use volume trading as a strategy

Volume trading can be used in various ways to analyse market movements and make informed decisions. Both short-term traders, such as day traders, and long-term investors can benefit from volume analysis. The key is how you interpret volume in combination with other factors to develop strategies tailored to your goals and time horizon. Below, we break down both short- and long-term approaches.

Short-term strategies: Day trading and scalping

In short-term trading, such as day trading or scalping, volume is used to make quick decisions in a volatile market. Traders focus on:

• Breakouts with high volume – an increase in volume during a breakout often indicates a sustainable price movement

• Trend reversals – volume spikes combined with a reversal suggest a possible change in direction

• Divergences – declining volume during rising prices signals weakness in the trend

Long-term strategies: Trend following and position building

Long-term investors use volume analysis to identify sustainable trends and market phases in assets such as stocks. Key approaches include:

• Confirming long-term trends – a stable trend with high volume indicates strong market sentiment

• Support and resistance levels – high volumes often mark key price zones

• Accumulation and distribution phases – volume patterns reveal whether investors are buying or selling assets

Tools for volume trading

The right tools are essential for effectively analysing volume data and incorporating it into trading strategies. Trading software and specialised platforms offer a range of features that benefit both beginners and experienced traders.

Some of the most important tools include:

• Charting software – enables detailed analysis of volume and price movements

• Volume indicators – built-in indicators like OBV, VWMA, and CMF help visualise volume patterns

• Footprint charts – provide detailed insights into volume at specific price levels

• Volume Profile – shows where the highest trading volume occurs, helping to identify support and resistance levels

• Demo accounts – ideal for beginners to test strategies and practise volume analysis before investing real capital

Pros and cons of volume trading

Volume trading offers clear advantages but also comes with challenges. Understanding the key pros and cons helps traders evaluate this method effectively.

Advantages:

• Provides additional insights into market dynamics and improves asset analysis

• Can indicate trend reversals early, optimising decision-making

• Helps identify support and resistance levels in charts

• Works well alongside other analysis methods, such as technical analysis

• Allows beginners to learn risk-free using demo accounts

Disadvantages:

• Requires a learning curve to interpret volume data correctly

• May produce less reliable signals in low-volume markets

• Relies on access to appropriate trading software and data

• Can lead to poor decisions if not understood properly

• Not every volume signal is meaningful, requiring experience and practice

Interpreting volume signals can be complex, and results in low-volume markets are often less reliable. To mitigate these drawbacks, effective risk management is essential. A strong strategy involves combining volume data with other indicators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD) to generate more reliable signals.

In low-volume markets, where a few large trades can heavily influence price action, it’s crucial to assess market liquidity and analyse signals over longer time frames. These approaches help minimise risk and make more informed decisions.

Conclusion: How to learn volume trading

A structured approach is key to learning volume trading, especially for beginners. Getting started typically involves building a solid theoretical foundation by reading guides and understanding key volume indicators. However, hands-on learning is essential. Here are some tips:

• Demo accounts – test strategies risk-free and practise interpreting volume data on realistic platforms

• Chart analysis – observe volume and price movements in markets like stocks to identify patterns

• Using software – familiarise yourself with trading tools and specialised volume analysis software

Volume trading isn’t limited to traditional markets like stocks. In crypto trading, analysing trading volume also provides valuable insights into market movements and helps make informed decisions. Since cryptocurrency markets are highly volatile and often experience significant volume spikes, they can be a great starting point for learning volume trading.

Further trading topics

Want to deepen your trading knowledge? The Bitpanda Academy offers in-depth articles on topics like margin trading, high-frequency trading, order types and more. Whether you’re looking to strengthen your fundamentals or explore advanced strategies, you’ll find the right resources to succeed in trading cryptocurrencies, stocks, and other assets.