What is Market Volume?

Volume represents the amount of the asset that’s been traded. So it’s showing us the level of activity in the market, which relates to the number of actual transactions going through. For example, if we’re looking at an individual company and seeing the volume over the past hour, if 1000 shares were traded during this time, the volume would be 1000.

How to View Volume

There are two main ways we can view volume on the charts. The most common way is volume-by-time, which is often represented by the bars along the bottom of the price chart. But another very useful way is volume-by-price, which shows what volume was transacted at different price levels.

There are also other ways to look at volume in the markets, including some very complex methods in specialised trading platforms. But for most traders, volume-by-time and volume-by-price will do the job for giving you the information you need.

Different markets will have different average levels of volume. If we’re looking at a major currency, we’d expect massive daily trading volumes. Whereas, smaller assets like low value stocks might not have much daily trading volume at all.

Volume and Volatility

The amount of volume in a market will contribute to how volatile the price movements are. Typically, markets with higher volume on a regular basis will be much more free flowing than those with low amounts of volume. However, when there’s low volume in a market, it’s much more susceptible to sudden erratic price movements if large transactions or a large quantity of transactions hit the market at the same time. This might happen when something takes place that changes the fundamental value of the asset, such as an economic event or earnings release.

Something to keep in mind is that volume is only one half of the equation. How volatile the price movements are will also depend on the level of liquidity in the market. If a market has high volume, we might not get such big price moves if there’s also high liquidity. But if there’s low liquidity, we’d expect the price to move a lot.

Volume in Decentralised Markets

Another important thing to keep in mind is that some markets are decentralised, such as currency markets. In those cases, the volume you’ll see will be only the volume for that specific broker or their partners, rather than for the whole market. However, this can still be useful as long as you look at the volume in relative rather than absolute terms (meaning, you’re comparing it to previous volume rather than taking it as a standalone measure). 

In some cases, the volume will be based on tick data. Rather than actually displaying the volume of the asset being traded, it’s making an assumption about the number of transactions that have been made based on the number of times the price moved a tick.

Volume can be helpful for validating the price moves we see. For example, if we compare two similar price moves, but one was achieved with low volume and the other had higher volume, that tells us something about the dynamics of the market. A question we can ask ourselves is whether the price move happened with an appropriate level of volume or whether there was an anomaly that signals something to us. We can also use volume to determine price levels where we’d expect paths of resistance or a smoother flowing move.