Volume: Understanding the Importance of Trading Volume in the Market
Volume is an essential factor in trading that every trader needs to understand well. It is the number of shares or contracts that are traded in a particular market during a specific period. Volume plays a crucial role in determining the strength of a trend, the momentum of a trade, and the overall market sentiment.
As a trader, you should keep an eye on the volume of the stocks or assets you are trading because it can help you make better decisions in your trades. In this blog post, we will take a closer look at trading volume, how it works, and its significance when trading.
How Volume Works in Trading
Trading volume refers to the number of shares or contracts that are traded during a specific period in the market. Usually, volume data is presented in a chart with a volume histogram, where the height of each bar represents the number of shares or contracts that have been traded in that particular period.
The volume data is calculated by taking the total number of shares or contracts traded on an exchange and dividing that by the trading sessions in the specific period. For example, a volume of 100,000 shares traded during a day session of 6 hours would result in a volume of 16,667 shares per hour of trading.
The Importance of Volume in Trading
Being aware of the volume of a stock or asset you are trading is vital because it provides you with valuable information that can impact your trades. The market sentiment reflected by the volume can be an important indicator of the continuation or reversal of a trend or momentum.
For example, if there is a significant increase in volume during an uptrend, it may indicate that more and more traders are jumping on the bandwagon and buying shares, implying a strong bullish momentum. Similarly, If the price of an asset rises but the volume is low, it may indicate that the market is not as bullish as it appears and the price could fall soon.
Volume can also help you identify trends early. Suppose you notice a surge in volume during a downtrend, it may indicate that the bearish momentum is gaining strength and could be an excellent opportunity to take a short position.
How Algoine Uses Volume
At Algoine, we use volume to help our users build automated trading strategies. Our platform allows professional traders to create, test and run their trading strategies on Binance, and one of the essential indicators that we incorporate is volume.
For instance, users can create a trading strategy that executes a long position in a security when the volume is above its 10-day average. Alternatively, it may be programmed to initiate a short position in a security when there is a significant increase in volume during a downtrend.
Conclusion
Trading volume is one of the most important factors that every trader should consider when making investment decisions. As a trader, you can take advantage of the market sentiment and momentum reflected by volume to develop a comprehensive trading strategy. Understanding the role of volume in trading can help you make informed decisions when trading, and ultimately lead to more profitable trades.