How to Use Volume Trading in the Stock Market

4 mins read
by Angel One

Trading with volume is a measure of how much a certain financial asset has traded within a certain period of time. For stocks, the number of shares traded give a measure of the volume traded. With respect to futures and options, the measure of volume traded is determined by how many contracts have changed hands among traders. Online charts provide other indicators that use volume data, including these numbers. 

By simply looking at volume patterns over time, one can easily get a sense of both the conviction and strength behind the declines and advances in specific stocks as well as entire markets. Options traders particularly benefit from volume trading as it is a stock’s trading volume that can indicate the option’s current interest. In fact, the volume of stock plays a crucial role in technical analysis and other prominent features among key technical indicators. 

Features of Trading Volume in Share Market

– The trading volume measures the number of futures and options’ contracts traded or the number of stocks traded. 

– Looking at volume trading in share market can indicate the market’s strength. Rising markets showcase an increase in their volume trading which is typically seen as healthy and strong.

– Suppose that the prices on a stock traded at high volume fall, this indicates that the trend is gathering strength to undergo a reversal.

– Suppose that a stock traded on low volume reaches new price highs, a trend reversal may be arising. 

– When it comes to technical analysis, the ‘Klinger Indicator’ and the ‘On Balance Volume indicator’ are two charting tools based on volume trading.

Volume trading uses in share market

When using volume as a metric to trade better, there are a solid set of guidelines that help determine the strength or weakness of a particular move. The goal is to avoid taking part in market moves that show weakness and join stronger moves. Alternatively, we may watch for an entry in the opposite direction of a potential weak move. The following guidelines can help us reach these goals when attempting volume trading. They are not set in stone, and hence, do not apply to every situation, but serve as a good general set of guidelines to keep in mind. 

1. Helps Confirm a Trend

Rising volume is usually one of the key indicators of a rising market. In a rising market, it is recommended that buyers continue to increase their numbers and enthusiasm so they can keep pushing the prices of the market higher. On the other hand, an increase in price with a decrease in volume could suggest a lack of interest. This is a warning or a potential reversal. Volume alone is not a strong indicator. A price drop in a large volume trade is a much stronger signal.

2. Seen Alongside Exhaustion Moves

In a market that is in a state of falling or rising, exhaustion moves can be observed. These are seen as sharp movements in price with a simultaneously sharp increase in volume. This signals the end of an ongoing trend. Participants who have waited potentially and are afraid of missing more of the move end up buying into the stock, exhausting the number of buyers. On the other hand, even falling prices can result in volatility of an increased volume of trades by forcing out swathes of traders at once. After the initial spike, in this case, one will normally see a decrease in volume. 

3. Indicates Bullish signs

Using volume as a trading tool can help when it comes to identifying bullish signs. This is seen in the following example. Let’s say that, on a price decline, one sees the share volume increase. This is followed by the price increasing for the short term and then moving back down. Suppose the second time it falls, the price doesn’t go below its prior low, and share volume is also lowered on this second drop. This indicates bullishness in the market. 


Keep in mind that when using volume trading in share market, you consider the latest volume of the shares as an indicator and not the volume at which the share was traded years ago. When used correctly, volume trading can be used to pick out market trends, reversals, signs of bullishness, buybacks and more.