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Using Volume to Validate Market Moves
Volume is one of those metrics that often sits quietly at the bottom of your chart, unnoticed by many traders. Yet, it plays a critical role in understanding the market’s behaviour. Think of volume as the fuel behind price movements—without it, even the most promising breakout can fizzle out. But, just like with fuel, more isn’t always better.
Today, we’re focusing on the simple volume histogram that appears at the bottom of most charts. While there are countless indicators built around volume—like On-Balance Volume (OBV) or the Volume-Weighted Average Price (VWAP)—the histogram is a straightforward, effective tool for gauging participation in the market. Let’s explore how to use it, how to put volume into context, and how it behaves with different price patterns, including the concept of volume divergence.
Simple Volume Histogram
Past performance is not a reliable indicator of future results
Why Volume Matters (and Why More Isn’t Always Better)
Volume measures how many shares or contracts change hands during a given period. When volume spikes, it signifies heightened interest—buyers and sellers actively engaging. However, it’s not as simple as “more volume equals better signals.”
For instance, a breakout on high volume often reflects strong conviction, but it can also indicate exhaustion at the end of a trend. Conversely, a low-volume breakout might lack the interest needed to sustain the move. Understanding the relationship between volume and price action is key to avoiding false signals.
A Simple Trick: The Volume Moving Average
One of the easiest ways to contextualise volume is by applying a moving average to the volume histogram. Platforms like TradingView make this simple: double-click the volume histogram, select ‘Style,’ tick the Volume MA box, and adjust the average length under ‘Inputs.’
A 9-period moving average, for example, acts as a baseline. When volume spikes significantly above the average, it suggests increased participation and potentially more meaningful price moves. Conversely, volume below the average often reflects quieter market phases.
Adding MA to Your Volume Histogram
Past performance is not a reliable indicator of future results
Volume Divergence: When Volume and Price Don’t Align
Volume divergence occurs when price action and volume move in opposite directions, often hinting at weakening trends or potential reversals.
Imagine an uptrend where the price makes higher highs, but volume decreases at each new peak. This divergence signals fading participation, suggesting the trend may be losing steam.
On the other hand, if the price trends lower while volume rises, sellers could be gaining momentum, increasing the likelihood of further downside.
Take the example below, where volume divergence on the FTSE 100 preceded a period of sideways consolidation.
Volume Divergence: FTSE 100 Daily Candle Chart
Past performance is not a reliable indicator of future results
Patterns That Thrive on High Volume
Certain price patterns rely on strong volume to confirm their validity. A classic example is a triangle breakout. As the price consolidates within the triangle, volume often contracts. When the breakout finally occurs, you want to see a surge in volume, confirming that participants are backing the move. Without it, the breakout might lack the conviction needed to sustain the trend.
Patterns That Prefer Lower Volume
Other patterns work best with subdued volume. A pullback within a trend is a great example. Let’s say a stock is in a strong uptrend and starts to retrace slightly. Ideally, you want to see declining volume during the pullback. This suggests the selling is more about profit-taking than aggressive distribution.
Once the pullback completes and the trend resumes, volume should pick up again. If the pullback occurs on high volume, it could indicate stronger selling pressure, signalling that the uptrend might be in trouble.
A Practical Example: DXY Pullback and Breakout
Let’s apply these concepts to a real-world case. In October, the dollar index (DXY) formed a steady uptrend followed by a pullback, creating a descending channel or bull flag.
During the flag formation, average volume declined, indicating reduced selling pressure. When the price broke out, volume surged to nearly triple the 20-day average—a clear signal of strong buying interest. This breakout led to a multi-week uptrend.
DXY Daily Candle Chart
Past performance is not a reliable indicator of future results
Final Thoughts
The volume histogram is a simple yet invaluable tool for traders. By applying a moving average to identify volume trends and watching for divergences between price and volume, you can gain a clearer understanding of market dynamics.
Volume isn’t just about how much activity is happening—it’s about when and how it aligns with price action. Whether you’re trading breakouts, pullbacks, or reversals, understanding volume can provide an essential layer of confirmation and help you spot potential warning signs.
Keep in mind, volume is just one piece of the puzzle. But when used correctly, it can give you a better sense of whether a price move has the backing it needs to succeed—or if it’s running on empty.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Today, we’re focusing on the simple volume histogram that appears at the bottom of most charts. While there are countless indicators built around volume—like On-Balance Volume (OBV) or the Volume-Weighted Average Price (VWAP)—the histogram is a straightforward, effective tool for gauging participation in the market. Let’s explore how to use it, how to put volume into context, and how it behaves with different price patterns, including the concept of volume divergence.
Simple Volume Histogram
Past performance is not a reliable indicator of future results
Why Volume Matters (and Why More Isn’t Always Better)
Volume measures how many shares or contracts change hands during a given period. When volume spikes, it signifies heightened interest—buyers and sellers actively engaging. However, it’s not as simple as “more volume equals better signals.”
For instance, a breakout on high volume often reflects strong conviction, but it can also indicate exhaustion at the end of a trend. Conversely, a low-volume breakout might lack the interest needed to sustain the move. Understanding the relationship between volume and price action is key to avoiding false signals.
A Simple Trick: The Volume Moving Average
One of the easiest ways to contextualise volume is by applying a moving average to the volume histogram. Platforms like TradingView make this simple: double-click the volume histogram, select ‘Style,’ tick the Volume MA box, and adjust the average length under ‘Inputs.’
A 9-period moving average, for example, acts as a baseline. When volume spikes significantly above the average, it suggests increased participation and potentially more meaningful price moves. Conversely, volume below the average often reflects quieter market phases.
Adding MA to Your Volume Histogram
Past performance is not a reliable indicator of future results
Volume Divergence: When Volume and Price Don’t Align
Volume divergence occurs when price action and volume move in opposite directions, often hinting at weakening trends or potential reversals.
Imagine an uptrend where the price makes higher highs, but volume decreases at each new peak. This divergence signals fading participation, suggesting the trend may be losing steam.
On the other hand, if the price trends lower while volume rises, sellers could be gaining momentum, increasing the likelihood of further downside.
Take the example below, where volume divergence on the FTSE 100 preceded a period of sideways consolidation.
Volume Divergence: FTSE 100 Daily Candle Chart
Past performance is not a reliable indicator of future results
Patterns That Thrive on High Volume
Certain price patterns rely on strong volume to confirm their validity. A classic example is a triangle breakout. As the price consolidates within the triangle, volume often contracts. When the breakout finally occurs, you want to see a surge in volume, confirming that participants are backing the move. Without it, the breakout might lack the conviction needed to sustain the trend.
Patterns That Prefer Lower Volume
Other patterns work best with subdued volume. A pullback within a trend is a great example. Let’s say a stock is in a strong uptrend and starts to retrace slightly. Ideally, you want to see declining volume during the pullback. This suggests the selling is more about profit-taking than aggressive distribution.
Once the pullback completes and the trend resumes, volume should pick up again. If the pullback occurs on high volume, it could indicate stronger selling pressure, signalling that the uptrend might be in trouble.
A Practical Example: DXY Pullback and Breakout
Let’s apply these concepts to a real-world case. In October, the dollar index (DXY) formed a steady uptrend followed by a pullback, creating a descending channel or bull flag.
During the flag formation, average volume declined, indicating reduced selling pressure. When the price broke out, volume surged to nearly triple the 20-day average—a clear signal of strong buying interest. This breakout led to a multi-week uptrend.
DXY Daily Candle Chart
Past performance is not a reliable indicator of future results
Final Thoughts
The volume histogram is a simple yet invaluable tool for traders. By applying a moving average to identify volume trends and watching for divergences between price and volume, you can gain a clearer understanding of market dynamics.
Volume isn’t just about how much activity is happening—it’s about when and how it aligns with price action. Whether you’re trading breakouts, pullbacks, or reversals, understanding volume can provide an essential layer of confirmation and help you spot potential warning signs.
Keep in mind, volume is just one piece of the puzzle. But when used correctly, it can give you a better sense of whether a price move has the backing it needs to succeed—or if it’s running on empty.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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