Trading Volume - The Signal That Moves Before Price
What is Trading Volume
Trading volume refers to the total quantity of an asset traded during a specific period. The volume corresponding to one candle is the sum of all trades executed during that period. It's typically displayed as a bar graph at the bottom of the chart.
In technical analysis, if price shows "what happened," volume shows "how much interest and energy was invested." Dow Theory also states that "volume confirms the trend," a principle that remains valid today.
"Volume precedes price." This saying comes from the observation that volume changes often appear before price changes. Even if price hasn't moved yet, if unusual volume changes are detected, a significant price movement may follow soon.
Why Volume Matters
Confirms Trend Authenticity
Even if price rises, you should question the sustainability of that rise if volume doesn't accompany it. Conversely, when price rises with a significant increase in volume, it means the movement is backed by genuine buying interest.
Validates Breakout Reliability
Volume plays a critical role in determining whether a support or resistance breakout is real or fake. Breakouts accompanied by volume spikes are more likely to be real, while breakouts without volume changes are more likely to be fake.
Shows Market Participant Interest
Increasing volume means growing market interest in that asset. It indicates new participants entering or existing participants actively moving.
Provides Early Warning of Trend Reversal
When volume gradually decreases while a trend continues, it signals that the trend's energy is depleting. This serves as an early warning that a trend reversal may be approaching.
The Relationship Between Price and Volume
Market conditions can be interpreted based on the combination of price direction and volume changes. The table below summarizes the most critical price-volume relationships.
| Price Direction | Volume Change | Interpretation | Signal Strength |
|---|---|---|---|
| Rising | Increasing | Strong buying pressure, healthy uptrend | Very bullish |
| Rising | Decreasing | Weakening buying interest, sustainability questionable | Weak bullish (warning) |
| Falling | Increasing | Strong selling pressure, downtrend confirmed | Very bearish |
| Falling | Decreasing | Weakening selling pressure, possible slowdown | Weak bearish (potential reversal) |
| Sideways | Increasing | Energy accumulation, big move imminent | Breakout preparation signal |
| Sideways | Decreasing | Decreasing interest, sideways likely to continue | Neutral |
Memorizing these relationships alone will significantly improve your chart reading ability. Don't just look at price—always make a habit of checking volume together.
Interpreting Volume Spikes
When volume suddenly increases significantly compared to normal, it's called a volume spike. This suggests either an important event occurred in the market or large participants are making moves.
Volume Spike During a Rise
When volume spikes during an uptrend, there are two scenarios:
- Spike in early to mid-trend: New buying is flooding in, which could mean acceleration of the uptrend.
- Spike in late trend: Could be a "Buying Climax" where the last wave of buyers rush in. In this case, it may actually be near the top.
Volume Spike During a Decline
When volume spikes during a downtrend, two interpretations are possible:
- Spike in early to mid-trend: Panic selling has begun, and further decline is possible.
- Spike in late trend: Could be a "Selling Climax." When panic selling reaches its peak and selling pressure exhausts, a bounce may begin afterward.
Volume Spike During Sideways
When volume suddenly spikes during a sideways range, a directional move is likely imminent. A breakout of trendlines or support/resistance may be approaching, so pay attention.
Climax Volume
Climax volume is an extreme volume spike appearing in the final stage of a trend. It represents the final explosion of the trend's energy and often precedes a trend reversal.
Buying Climax
After a prolonged rise, price surges with record-high volume. Late buyers (often called "FOMO buyers") rush in, but smart money may be offloading positions at this time. Price often reverses to the downside after a buying climax.
Selling Climax
After a prolonged decline, price plunges with extreme volume. Terrified investors dump their holdings (panic selling), but bargain hunters absorb the selling. Price often forms a bottom and begins a bounce after a selling climax.
Identifying climax volume is not easy. It's difficult to judge in real-time whether "this is a climax or the start of trend acceleration." It's common to confirm retrospectively by observing subsequent price movements and volume patterns.
Warning Signs from Low Volume
Low volume is just as important as high volume for providing information.
Volume Decrease During a Trend
If price keeps rising but volume gradually decreases, this can be seen as divergence—price and volume moving in opposite directions. This phenomenon signals trend weakening and warns that a correction or reversal may come soon.
Similarly, if price keeps falling but volume decreases, selling pressure is weakening, so the possibility of a bounce should be considered.
Breakout Without Volume
If a resistance level is broken but volume remains similar to normal or actually decreases, it's likely a fakeout (false breakout). Genuine breakouts must be backed by volume.
Extremely Low Volume
Periods of extremely low volume indicate market disinterest. After prolonged periods of this, big directional moves sometimes occur. It's like "the calm before the storm."
Volume Analysis Tools
There are useful supplementary indicators for analyzing volume on charts.
| Tool | Description | Application |
|---|---|---|
| Volume Bars | Basic volume display below candles | Intuitively assess relationship with price |
| Volume Moving Average | N-day moving average of volume | Judge if current volume is high or low vs. average |
| OBV (On-Balance Volume) | Cumulative up-day volume minus down-day volume | Detect price-volume divergence |
| Volume Profile | Cumulative volume displayed by price level | Identify volume clusters (high-volume price zones) |
| VWAP | Volume Weighted Average Price | Estimate institutional average entry price, dynamic support/resistance |
OBV in particular is a simple yet effective tool. If price is moving sideways but OBV is rising, accumulation may be occurring; conversely, if OBV is falling, distribution may be occurring.
Volume Analysis in Cryptocurrency Markets
When analyzing cryptocurrency market volume, you need to consider characteristics different from traditional markets.
24-Hour Markets
Unlike stock markets, cryptocurrencies trade 24/7, so volume concentration patterns by time zone differ. Volume tends to be higher when US and Asian markets overlap. On weekends, volume is relatively lower, making markets vulnerable to sharp price movements.
Beware of Wash Trading
Some exchanges, especially those with loose regulations, inflate volume through wash trading (self-dealing). To avoid being fooled by fake volume:
- Use data from major regulated exchanges
- Reference "Adjusted Volume" from CoinGecko or CoinMarketCap
- Check order book depth together to assess actual liquidity
Volume in Small Altcoins
Coins with small market caps have low volume, so trading volume can fluctuate wildly due to a few large traders. Volume analysis in such coins has lower reliability, so interpret more conservatively compared to major coins like Bitcoin or Ethereum.
Distinguishing Futures and Spot Volume
In cryptocurrency markets, it's useful to distinguish between spot volume and futures volume. Changes in futures market volume and open interest are useful for understanding leveraged position trends. When open interest surges, liquidation risk may increase.
Volume Analysis Practical Checklist
Here's a practical checklist for using volume in trading decisions:
- What level is current volume compared to the 20-day volume moving average?
- Do price direction and volume changes align, or is there divergence?
- Did volume increase significantly compared to normal when support/resistance broke?
- If there was a recent volume spike, is it early or late in the trend?
- Do candlestick pattern signals align with volume?
Volume is the second most important data after price for reading charts. Looking only at price means seeing only half the picture—you need to analyze volume together to see the market's full picture. In the next article, we'll examine moving averages, the most fundamental technical indicator for identifying trend direction.
Next article: Moving Averages - The Fundamental Indicator for Trend Direction