Volume is the number of contracts, shares, or FX lots traded during a given time period. Daily volume is the number of contracts exchanged in a single trading day. One-minute volume refers to the amount of contracts exchanged in 60 seconds.
High, Low, and Relative Volume
High volume in a market typically signifies active trading, while low volume suggests less active participation. Certain assets consistently experience high trading volumes due to popularity among day traders and investors, whereas others consistently have low volumes, attracting less attention from short-term traders.
Relative volume is also significant. When a usually high-volume stock experiences a drop in trading activity, it indicates a temporary waning of interest from traders. Conversely, increased trading activity in a typically low-volume asset signals newfound interest and activity in the market.
Volume is commonly depicted as vertical bars along the bottom of an asset's price chart, representing the number of contracts, shares, or lots traded during a specific time frame. For instance, on a one-minute price chart for a futures contract, each price bar is accompanied by a vertical volume bar indicating the volume of trades during that minute.
Buying and Selling Volume
The total volume consists of both buying and selling volume. Buying volume is the number of shares, contracts, or lots involved with purchasing trades, whereas selling volume is the number associated with selling deals.
This notion is frequently challenging for inexperienced traders because every deal necessitates both a buyer and a seller of the specified asset. However, you may distinguish between buying and selling volume based on whether a transaction occurred at the bid or ask price.
Bid and Ask Volume
The bid price represents the highest amount a buyer is willing to pay for an asset, while the ask price signifies the lowest price at which a seller is willing to sell. These prices are constantly in flux due to market activity. When engaging in buying or selling, there are three options available:
Place a bid to buy or an offer to sell.
Execute an instant purchase from someone offering to sell.
Execute an instant sale to someone offering to buy.
When a transaction occurs at the bid price, it contributes to the bid volume, which is essentially the selling volume as it can potentially push the price down. For instance, if one trader bids for 100 shares at $10.01 and another bids for 100 shares at $10.02, and a third trader sells 100 shares to the second trader at $10.02, the initial bid at $10.02 will vanish, and the new bid will be $10.01, thus lowering the price due to selling volume.
Conversely, when a transaction takes place at the ask price, it adds to the ask volume, which is the buying volume as it can push the price up. For example, if one trader offers 100 shares at $10.01 and another offers 100 shares at $10.02, and a third trader buys 100 shares at $10.01, the initial offer at $10.01 will disappear, and the new offer will be $10.02, increasing the price due to buying volume.
More Buyers or Sellers
When there's a surge in buying volume compared to selling volume in a market, it indicates a higher number of traders purchasing at the ask price, typically leading to an upward pressure on prices. Conversely, when there's more selling volume than buying volume, it suggests a greater number of traders offloading at the bid price, often resulting in downward price movement.
The balance between buyers and sellers is dynamic and can shift frequently, even within short timeframes. These fluctuations drive the market to fluctuate in both upward and downward trends instead of moving in a singular direction.
Trading Based on Volume
Volume changes, as well as determining if more transactions are taking place at the bid or offer price, provide traders with short-term indicators of where the price may go next.
Unfortunately, the number of persons buying and selling, as well as the pricing at which they do so, are always fluctuating. As a result, while volume can reveal a lot about a specific market, it is only one instrument and should not be relied completely on when making trading decisions.
Disclaimer
Derivative investments involve significant risks that may result in the loss of your invested capital. You are advised to carefully read and study the legality of the company, products, and trading rules before deciding to invest your money. Be responsible and accountable in your trading.
RISK WARNING IN TRADING
Transactions via margin involve leverage mechanisms, have high risks, and may not be suitable for all investors. THERE IS NO GUARANTEE OF PROFIT on your investment, so be cautious of those who promise profits in trading. It's recommended not to use funds if you're not ready to incur losses. Before deciding to trade, make sure you understand the risks involved and also consider your experience.
