What is a Trading Volume: Complete Guide to Market Liquidity

Published On: 2025-11-06

Prepared by Jameson Richman and our team of experts with over a decade of experience in cryptocurrency and digital asset analysis. Learn more about us.

If you're asking what is a trading volume and why it matters for traders and investors, this comprehensive guide explains the concept, measurements, indicators, strategies, and practical ways to apply volume analysis across markets. You'll learn how trading volume reflects liquidity and conviction, how to use volume-based indicators (VWAP, OBV, Volume Profile), pitfalls to avoid, real examples, and where to practice or test strategies on modern exchanges.

Quick definition: What is a trading volume?

Trading volume is the total number of shares, contracts, or units of a financial instrument that change hands during a given time period. In equities, it’s commonly reported as the number of shares traded in a day; in crypto and futures it can be the number of coins or contracts. Volume is a direct measure of market activity, liquidity, and interest in an asset. For more formal background, see the Wikipedia entry on trading volume.

Wikipedia: Trading volume

Why trading volume matters

Liquidity: Higher volume generally means tighter spreads and easier execution, reducing slippage for both market and limit orders.
Price confirmation: Price moves on high volume are considered more reliable; a breakout on low volume is vulnerable to failure.
Market sentiment and conviction: Volume spikes can indicate strong buying or selling pressure and often precede sustained trends or reversals.
Order flow visibility: Volume helps infer supply and demand dynamics when combined with price action and order book data.

Types and measurements of volume

Volume can be reported in different ways depending on the market and the data provider:

Daily/Periodic Volume: Aggregate units traded during a day, hour, or minute.
Tick Volume: Number of price updates (ticks) in markets that don’t publish traded quantity (common in Forex). It is a proxy, not the actual traded quantity.
On-Chain Volume: For crypto, exchanges and blockchains can show token transfers on-chain and exchange-reported spot/margin/derivatives volume. Cross-check both for accuracy.
Notional Volume: Volume measured in currency value (e.g., $ volume = price × quantity). Useful for comparing liquidity across instruments with different unit sizes.

Key volume-related concepts every trader must know

Volume spikes: Sudden increases that often mark institutional activity, news reactions, or liquidity imbalances.
Volume trend: Rising volume during an uptrend supports continuation; decreasing volume suggests weakening interest.
Price-volume divergence: Price making new highs while volume declines is a warning sign of a potential reversal.
Volume at Price (Volume Profile): Displays where trading occurred at specific price levels, identifying value areas and support/resistance.
VWAP (Volume Weighted Average Price): Useful intraday benchmark showing average price weighted by volume—important for institutions to evaluate execution quality.

Common volume indicators and how to use them

1. On-Balance Volume (OBV)

OBV is a running total that adds volume on up days and subtracts volume on down days. It’s designed to show whether volume is flowing into or out of a security. Use OBV to spot divergences: if price rises but OBV stays flat or falls, the rally may lack support.

How to use it:

Confirm trends: rising OBV with rising price confirms uptrend.
Spot divergences: OBV divergence from price can predict reversals.

2. Volume Weighted Average Price (VWAP)

VWAP is calculated as the average price of an asset throughout the day, weighted by volume. Institutions often use VWAP to assess trade execution: buying below VWAP is considered favorable. Day traders use VWAP as dynamic support/resistance.

Practical tip: use VWAP to align intraday entries with institutional flow. See practical workarounds for indicator limits on TradingView if your platform restricts indicator usage: TradingView indicator limit — practical tips.

3. Volume Profile / Market Profile

Volume Profile plots volume at price levels rather than by time. It reveals price zones where the most trading occurred (high volume nodes), which often act as support or resistance, and low volume nodes which can be swept quickly.

Use cases:

Identify value areas for mean reversion trades.
Locate breakout targets and stop placement (low volume areas fuel fast moves).

4. Accumulation/Distribution Line

This indicator assesses whether a security is being accumulated (bought) or distributed (sold). It weights volume by where the close lies in the period’s range. It’s more nuanced than OBV and can provide earlier signals.

5. Chaikin Money Flow (CMF)

CMF measures the amount of Money Flow Volume over a set period, showing buying vs selling pressure. Positive CMF suggests accumulation, negative suggests distribution.

Using volume with price action: practical trading rules

Volume is most powerful when combined with price action rather than used alone. Here are practical, implementable rules:

Rule 1 — Confirm breakouts: Only consider breakouts reliable if accompanied by above-average volume relative to recent history (e.g., >1.5–2x average volume).
Rule 2 — Validate trend continuation: During an uptrend, expect pullbacks to occur on lower volume; if pullback volume exceeds trend volume, prepare for trend reversal.
Rule 3 — Use volume clusters for entries/exits: Enter near high-volume support areas with tight stops; target low-volume areas where price can move quickly.
Rule 4 — Beware of false signals: Volume can spike on news or wash trading—confirm with price action and on-chain/exchange reliability.
Rule 5 — Use VWAP intraday: Align intraday buys with touches above VWAP and sells below VWAP as dynamic bias.

Real-world examples

Example 1 — Stock breakout validated by volume

A stock trades in a range and breaks above resistance at $50 with a volume spike to 2.5x the 20-day average. The breakout closes above resistance on strong volume. According to volume rules, this setup has higher probability of continuation. A trader might enter on the close or a pullback to $50–$51 with a stop under the breakout candle low and target measured by the range height.

Example 2 — Crypto pump with suspicious volume

A small-cap altcoin jumps 40% on reported partnership news but exchange-reported volume shows massive spikes localized to lesser-known exchanges. On-chain reporting and order book depth reveal thin liquidity—this can be a pump-and-dump. Cross-check reported volume and consider avoiding entries unless order book depth and reputable exchange volume support the move. See proven order book strategies for modern markets to better read order book signals: Proven order book trading strategies.

Volume in different markets — nuances to consider

Stocks

Stock volume is usually reliable, reported by exchanges and consolidated tape. Institutional trades can occur off-exchange, which can reduce visible volume. For large-cap stocks, volume tends to be high and spreads narrow.

Cryptocurrency

Crypto volume varies by exchange and can be subject to wash trading and reporting inconsistencies. It’s essential to cross-check on-chain transfers, reputable exchange volumes (e.g., Binance, Bybit), and liquidity on order books before acting on volume signals. For practicing crypto trading, consider reputable exchanges with good liquidity:

Forex

Spot Forex lacks centralized volume data; most retail platforms show tick volume as a proxy. Institutional Forex desks use liquidity and order book access; if you trade Forex, rely more on price action, order flow tools, and tick volume patterns. Copy trading strategies may use volume proxies to scale trade sizes — see this guide on copy trading meaning and practical uses: Copy trading meaning in Forex — complete guide.

Order book and volume: a deeper look

Order book data (depth) provides live insight into liquidity at price levels—bids and asks with sizes. Combining traded volume with order book changes is a high-value approach:

Large resting orders that persist at a level indicate durable liquidity.
Orders that suddenly cancel before price reaches levels suggest spoofing or liquidity withdrawal risk.
Volume through the book (executed trades) vs. book liquidity shows how much price moves when liquidity is consumed.

To learn specific order book trading strategies tailored to modern markets, including reading execution prints vs. book depth, consult this in-depth article: Proven order book trading strategies.

Practical workflow: How to incorporate volume into your trading plan

Here is a step-by-step, actionable workflow to use volume effectively:

Data selection: Choose reliable data sources (exchange consolidated tape for stocks, reputable exchanges and on-chain data for crypto).
Baseline volume: Compute a baseline (20- or 50-period average) and thresholds (e.g., 1.5× or 2× average) for volume spikes.
Indicator setup: Add OBV, VWAP (intraday), and a Volume Profile or VPOC (volume point of control) to your charting tool.
Signal rules: Define entry and exit rules that require both price action and volume confirmation (see the “Rules” section above).
Order sizing & risk: Adjust position size for thin-volume assets; expect slippage and widen stops if volume and book depth are low.
Execution & monitoring: Use limit orders where possible; monitor real-time volume and book changes for order flow clues.
Post-trade review: Log volume context for every trade to build a statistical edge (which setups perform best with volume confirmation?).

Backtesting volume-based strategies

Volume-based strategies can be backtested, but be mindful of these issues:

Data quality: Ensure your historical volume data matches the exchange and includes the same timeframes (intraday vs. daily).
Survivorship and selection bias: Use a consistent universe of instruments and account for delistings.
Costs and slippage: Model realistic slippage based on average daily volume and order book depth, especially for large position sizes.
Overfitting risk: Avoid overly complex rules tied to specific volume thresholds without cross-validation.

Volume pitfalls and how to avoid them

Volume signals are powerful but can lead to false conclusions when misused. Watch for:

Wash trading and fake volume: Some exchanges or illiquid tokens show inflated volume. Cross-check with reputable sources and on-chain metrics.
News-driven volatility: Volume spikes on news may produce temporary moves that reverse once information is digested.
Market microstructure changes: Algorithmic and HFT activity can change intraday volume patterns; historical patterns may evolve.
Timeframe mismatch: Using daily volume signals to make minute-by-minute trades leads to noise; match the timeframe logically.

Useful sources and further reading

Authoritative resources:

Investopedia: Volume definition and uses — good primer and examples.
U.S. Securities and Exchange Commission — guidance on market structure and liquidity for public markets.
Wikipedia: Trading volume — background and references.

Advanced techniques: combining order flow, volume profile, and algorithmic signals

Advanced traders combine multiple layers of volume information:

Executed volume vs. resting liquidity: Monitor how much of the book is executed at each price to detect absorption or aggressive buying/selling.
Volume clusters with delta: On platforms that provide trade-by-trade direction, use volume delta (buy volume vs sell volume) to detect who is aggressive.
Algorithmic filters: Use machine learning or statistical models to identify patterns where volume signals historically led to favorable outcomes—only after rigorous cross-validation.

How to practice volume-based trading safely

Testing is essential before risking real capital. Do this:

Paper trade on reputable platforms or use small position sizes on exchanges with good liquidity like Binance, Bitget, Bybit, or MEXC to learn execution characteristics:
Backtest systematically with quality tick and intraday volume data, including slippage models.
Trade small, review, repeat: Keep a trade journal focused on volume context and execution outcomes.

Case study: Using volume to improve a breakout strategy (step-by-step)

Here’s an example blueprint you can implement immediately:

Instrument selection: Choose a liquid instrument (e.g., S&P 500 ETF, BTC/USDT pair on a major exchange).
Base timeframe: Use daily for swing trades or 15–60 minutes for intraday entries, and compute the 20-period average volume.
Breakout rule: Enter long when price closes above daily resistance with volume ≥ 1.8× 20-day average volume.
Stop placement: Place stop under breakout candle low or below last low-volume node on Volume Profile.
Targeting: Use measured moves (range height) or exit as price hits low-volume nodes where rapid moves stall.
Risk control: Risk ≤ 1–2% of account per trade; reduce position size in low-liquidity instruments.
Validation: Backtest for at least 2–5 years of data, adjust volume multiple for market conditions, and forward-test in paper/live small size.

When volume lies — red flags to watch

Volume isn’t foolproof. Be wary of:

Exchange manipulation or wash trades: Some platforms inflate volume figures. Cross-verify with on-chain data and reputable exchange volumes.
Large reported volume with no price move: Could indicate market makers offloading inventory without moving the market, or reporting errors.
Disconnected time zones: Daily volume patterns change with session overlaps (e.g., equity markets vs. crypto 24/7 trading).

Frequently asked questions (FAQ)

Q: Is higher volume always better?

A: Higher volume usually means better liquidity and cleaner signals, but context matters. A high-volume spike on misleading news, wash trading, or in an instrument with poor order book depth can produce false signals.

Q: How do I compare volume between different assets?

A: Use notional volume (dollar volume) to compare instruments with different unit sizes. You can also normalize volume by average daily volume (ADV) or market capitalization for relative comparisons.

Q: Can I rely on tick volume in Forex?

A: Tick volume is an imperfect proxy but often useful. Combine tick volume with price action and liquidity indicators if you trade Forex.

Conclusion — integrate volume to make smarter trades

Understanding what is a trading volume and how to apply it will materially improve trade selection, execution, and risk management. Use volume to confirm breakouts, gauge trend strength, and interpret order flow. Combine reliable volume data with price action, order book analysis, and sound risk controls. Backtest thoroughly, practice on reputable exchanges, and learn to spot volume anomalies such as wash trading or exchange reporting differences.

For deeper tactical approaches, study order book trading strategies and practical indicator workarounds:

Armed with volume awareness and disciplined execution, you’ll be better positioned to read market conviction, avoid traps, and build a consistent edge.