Using Volume to Improve Your Likelihood of Trade Success

Written byMontana Timpson
Published on07 October 2022

Synopsis


Many active traders rely on volume to confirm chart patterns, breakouts, reversal trades and trends. Trading volume plays an important role in technical analysis and features prominently among key technical indicators.


Understanding volume as a measure of liquidity and sentiment is imperative for any professional trader. Here’s how you can use volume to improve your likelihood of trade success.


Trading Volume


By definition, trading volume is a measure of all the recorded trades for a security during a specified period of time. Volume measures the number of shares traded in a stock or contracts traded in futures or options. For active traders, volume is an important indicator that shows the liquidity of a stock, which can aid in trend confirmation and can help to establish ideal entry and exit points in trade positions.


In public stock markets such as the Nasdaq or New York Stock Exchange (NYSE), transactions are recorded and publicly displayed. Traders can access a list of all transactions at any point during the day, including exactly when a stock changed hands, the various prices at which the stock changed hands and the number of shares that were traded each time. This information is key for any professional trader in helping to determine future trends, reversals and breakouts.


Using Volume for Trend Confirmation


Trend trading is a trading style that attempts to capture gains through the analysis of an asset's momentum in a particular direction. In trend trades, volume should be in favor of the direction of the trend. A strong rising market should therefore see rising volume in tandem.


Generally, professional traders seek out stocks with higher trading volumes, as rising volume and price often indicate strong buyer interest, which makes the stock more liquid — easier to buy and sell. Increasing volume and price indicate that more traders are willing to buy the stock, while decreasing volume and increasing price show a lack of bullish sentiment, and possibly a potential trend reversal.


Using Volume for Price Reversal Trades


A trend reversal indicates shifting sentiment from an established trend to a new trend forming in the opposite direction. After a long price move higher or lower, if the price of a security begins to range with little price movement and heavy volume, this might indicate that a reversal is underway, and prices are likely to change direction.


Using Volume for Breakout Confirmation


Alongside confirming trends and indicating future price reversals, trading volume can help establish potential breakout stocks. A breakout is a potential trading opportunity that occurs when an asset’s price moves above a resistance level or moves below a support level on increasing volume. Breakout trading is a trading strategy in which active traders enter a long position after a stock price breaks above resistance or enters a short position after a stock breaks below support.


When a breakout happens, there is a shift in demand and supply. Volume is a crucial component of this shift. On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout indicates a lack of interest and a higher probability for a false breakout.


Volume Charting


Within most charting platforms, a volume indicator is presented in a separate window below the price chart, just like other indicators used in technical analysis. The volume transacted in the given timeframe is represented as a bar, which is often color-coded.


The color of the bar shows whether the price of a security closes up or down. A green bar is generally used to show that the security closed higher during the trading session while a red bar is used to indicate that the security closed lower. The height of the bar shows whether there is an increase or a decrease in volume of the security transacted — a taller bar shows a higher volume while a shorter bar shows a lower volume.


When tracking trading volumes within the Lightspeed Trader platform, clients are provided with a multitude of integrated charting capabilities, customizable for a number of volume trading strategies. Lightspeed delivers a robust trading system to the day traders and professionals that demand highly established market data and performance, and volume charting as described above is just one of many expert features and functions of the Lightspeed Trader platform.


For more information regarding the Lightspeed Trader platform, visit Lightspeed’s Trading Software page. For more professional trading insights, check out Lightspeed’s Active Trading Blog, and for additional references, guides and resources, view our Trading Education Center featuring a comprehensive glossary for professional traders.



Active Trading with Lightspeed


Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.


For more information on a professional trading platform with Lightspeed, please call us at 1-888-577-3123, request a demo, or open an account.


Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the users’ independent analyses taking into consideration your financial circumstances, investment objectives, and risk tolerance.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“Content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the user's independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer or recommend any of the services or commentary provided by any of the market commentators/educators or service providers, and any information used to execute any trading strategies are solely based on the independent analysis of the user.


Futures trading involves the substantial risk of loss and is not suitable for all investors.

Each investor must consider whether this is a suitable investment since you may lose all of or more than your initial investment.

Past performance is not indicative of future results.


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Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“Content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content are solely based on the user's independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer or recommend any of the services or commentary provided by any of the market commentators/educators or service providers, and any information used to execute any trading strategies are solely based on the independent analysis of the user.

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