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Volume Candle Chart : Secrets Of Trading With Top 5 Volume Indicators

volume candle chart secrets

If there is a trading secret, it is to start looking at volume candles and volume candle charts.

I say this because smart money is where you should be, and smart money or big players can hide from you, but they cannot hide what they do in terms of volume, which is what you should start looking at to get a sense of whether the money is on the long or short side.


Table of Contents


In this blog, I’ll go over the Volume Candle Chart, as well as Candlestick patterns and the top 5 Volume Indicators that can help you improve your trading and spot what others can’t, giving you a trading advantage.

What is Trading Volume ?

In financial markets, the total number of shares or contracts exchanged within a specific period is referred to as trading volume or trade volume. The volume of trade servers is a technical measure of market activity. The higher the volume, the more active the market is, and vice versa.

Any financial asset, including stocks, currencies, indices, bonds, derivatives, yields, and commodities, could be measured using trading volume.

Trading volume is used by traders and investors to determine whether a trend will continue or reverse. Higher trade volume leads to more market liquidity. It shows that the markets are quite active, which makes it simpler for market players to carry out their trades. Likewise, decreased trading volumes result in lower liquidity and less order execution.

volume candle charts

Example

Trader ‘A’ purchases 500 units of Amazon stocks from Trader ‘X’ and sells 300 shares of Amazon stock to Trader ‘B’.

Total volume of amazon stocks ( if no other transaction has been done) will be = 800 ( 500 + 300)

It is critical to remember that while calculating volume, each buy/sell transaction is only tallied once. If two people buy and sell a certain number of shares, say 100, the total volume will be 100 rather than 200 in this case.

The trade volume is thus determined by the impact of buying and selling shares at a specific trading time period.

What does Trading Volume indicate ?

Volume candle chart

Trading volume represents the current market’s activity and liquidity of financial assets throughout the course of the current trading period. At the end of the trading session, accurate volume numbers are shown. For example, 1 hour of data shows the total trading volume at the end of a 1-hour trading session.

Trading volume is a useful metric since it may assist in establishing any substantial market swings over time.

Similarly if candlesticks are analyzed over a period of 30 minutes each volume bar will indicate the trading volume fir that 30 minutes only.

Relationship between Volume and Price

A stronger, more meaningful bullish movement will be considered to have occurred if both volume and price increase.

A bullish trend may be about to reverse if the volume is falling while the price is rising. This situation might cause a market consolidation period.

Conversely, a stronger bearish movement will occur if the volume is rising while the price is falling.

A bullish reversal is likely to take place if both volume and price are falling, which indicates that the bearish trend is diminishing.

The relationship between volume and price is summarized in this table:

Price VolumeExpected
UpUpBullish
UpDownSideways/Bearish Reversal
DownUpBearish
DownDownSideways/Bullish Reversal
Volume – Price Relationship

It should be noted that as market volume declines, many fake out moves occur. In such a circumstance, a trader should avoid placing orders.

The Significance of High Trading Volume

The high volume shows that there is a greater interest in buying or selling in the market.

When the market is up trending and the volume is increasing, the market will continue to rise. It indicates the presence and interest of buyers in buying that asset.

Similarly, when the market is down trending and the volume is increasing, the market will continue to fall. It shows that there are more sellers interested in selling that asset.

The Significance of Low Trading Volume

Low volume shows a lack of market interest.

When a stock rises as volume falls, it implies a decrease in buyer interest in an asset, which may lead to a bearish reversal.

Similarly, when the market is down trending and volume is diminishing, it suggests that sellers are no longer interested in pushing prices lower and that the downtrend is about to reverse.

What is Volume Candle Chart?

A Volume Candle Chart is a technical analysis tool that combines candlestick elements with volume to create a larger or smaller candlestick based on the selected time period.

When trading an instrument, candlestick charts are one of the most efficient means of analyzing prices and volumes.

The color composition of a candlestick offers traders extra information about the market’s direction.

The candlestick’s thick body indicates the difference between the opening and closing prices. The top wick represents the highest price, while the bottom wick represents the lowest price.

How to use Volume Candles on a Candlestick Chart?

The width of a candlestick signifies volume, which shows the market’s strength and weaknesses. A bullish price trading session is indicated by a green volume candle, which indicates more aggressive and willing buyers. A red candle, on the other hand, signifies a bearish price trading session, which indicates that sellers are more aggressive and determined to drive prices lower.

Types of Volume Candles

Volume Candles may be divided into two groups based on their body lengths: short and long.

Long body Volume candles

Long body volume candles indicate a high level of volatility. The greater the length of the body, the more aggressive the buying or selling volume. This indicates that either buyers or sellers are more powerful. Marubozu and Engulfing candles are two such instances.

Long body candles are indicated by the arrow in the chart below. Keep an eye on how the price moves in the direction of the volume of candles.

Long Body Volume Candles
Long Body Candles – High Volume

Short Body Volume Candles

A low amount of buying or selling activity is shown by short bodies. The weaker the buying or selling volume, the shorter the body. This indicates that the market’s current momentum is fading and might cause reversals. Examples include spinning tops and Doji.

Short body formations are visible on this chart near the trend’s end. The reversal volume also supports the emergence of a new trend.

Volume Candle charts
Short Body Candles – Low Volume

Volume Candle Chart with Support and Resistance

A straight path is never followed by the price. The price oscillates between levels of support and resistance. When analyzing a chart, traders frequently focus on finding areas of support and resistance.

Traders frequently buy near the support areas and sell near the resistance areas.

Combining Volume Candles at critical levels provides a trader with consistent entry and exit signals. For instance, it would be a favorable hint for buyers to execute a long entry if a Marubozu candle appears after testing a support zone. In this case, the Marubozu candle provides a significant buying volume.

As you can see from the chart, a very long body candle with a good amount of volume has formed, indicating the possibility of a strong bullish move at the critical support level.

Prices did move upwards with strong momentum after that which proves us the point that if support level is followed by good volume buying it may proved to be a reliable signal for buy entry.

Volume Candle chart support
Support zone, Volume Candle and Volume Indicator

Volume Candle Chart with Trend Lines

Volume candles with trendlines often prove to be a great combination. You can become a very good trendline player if you understand volume spikes at trendline dynamic support.

As shown in the figure, a trend line is formed in this chart by connecting two swing lows. Later, a pullback tested the trendline support for the third time, resulting in a dual candlestick pattern. There was a bullish engulfing volume candle. The volume indicator also indicated a high volume. Later, the price maintained its previous movement.

(If a volume bar is prolonged near crucial levels, it might indicate whether bulls or bears are ready to push the market higher or down. Low volume is indicated by small bars. The green bar represents bullish momentum, whereas the red bar represents bearish momentum.)

Trend line, Volume Candle and Volume Indicator
Trend line, Volume Candle, and Volume Indicator

Volume Candle Chart-Examples:

The volume candle chart provides a visual representation of the market volume and its influence on price movement. Volume candles help you understand the sentiments of buyers and sellers to determine who is dominating the market.

Volume Candle Chart for Breakout and Pullback-

On the chart below, a large volume candle broke through a small resistance zone, confirming a downtrend. After a while, the price retested the broken support level and formed another bearish volume candle (engulfing pattern), indicating that the downtrend would continue. A volume indicator also showed high momentum, and the downturn persisted.

Breakout Volume Candle chart
Breakout and Pullback (Support Level) – Volume Candle and Volume Indicator

Another chart shows a trend line breakout by a bullish volume candle, which indicates a reversal sign. A lower low formation provided significant support. After testing it, the price formed a bullish engulfing pattern. A volume indicator also suggested strong momentum, which is a favorable sign of bullish movement. After that, the price continued to move in favor of buyers.

Volume Candle and Volume Indicator
Breakout and Pullback (Trend line) – Volume Candle and Volume Indicator

These volume indicators assist traders in analyzing trading volume. Integrating them with candlestick chart patterns can boost the probability of winning.

On Balance Volume (OBV)

On balance volume (OBV) is a volume indicator that is used to determine market trends. It may also be used to identify buying and selling prices and find divergences.

How to Interpret

When both price and OBV have the same structure, the trend is prevalent. For example, if both price and OBV are making higher highs and higher lows, the uptrend is expected to continue, as seen on the chart.

volume candle chart with OBV
On Balance Volume and Price Action

When price continues to make higher highs but OBV makes lower highs, the uptrend is likely to collapse, which is referred to as Bearish Divergence. The market is forming a bearish reversal trend in this situation.

When price continues to make lower lows but OBV makes higher lows, the downtrend is likely to fail, which is referred to as Bullish Divergence. The market creates a bullish reversal trend in this situation.

Relative Strength Index (RSI) Volume

The RSI Volume Indicator may be quite helpful in determining whether the trend will continue or reverse. This indicator has a center line of 50 and oscillates between 0 and 100.

How to Interpret

The positive trend continues when the volume RSI crosses 50.

Similarly, a bearish trend is in effect when the Volume RSI drops below 50.

Additionally, the market is considered overbought if the RSI climbs above 70. On the other hand, the market is considered oversold if the RSI drops below 30.

Volume candle chart with RSI
Volume RSI – Over-bought and Oversold

The Accumulation/Distribution Volume Indicator

Accumulation/Distribution is a volume-based indicator used to monitor an asset’s cumulative flow of supply and demand. This indicator is primarily used to detect price and volume flow divergences.

How to Interpret

The uptrend is expected to continue when both the indicator and the price create higher highs and higher lows.

When both the indicator and the price create lower highs and lower lows, the downtrend is likely to persist.

When the price continues to form an uptrend while the indicator forms a downtrend, it indicates a bearish divergence, and a reversal trend is probable.

Similarly, if the price is in a downtrend while the indicator is in an uptrend, a bullish divergence and a reversal trend are expected.

We can observe from this figure that the emergence of divergence reversed the trend:

Accumulation/Distribution
Accumulation/Distribution – Bullish Divergence and Uptrend

Chaikin Money Flow (CMF) Volume Indicator

The Chaikin Money Flow (CMF) is a volume indicator that assesses the market’s momentum and money flow index. A trader can use this indicator to identify trends and determine if the market is overbought or oversold.

How to Interpret

A CMF value above the zero line denotes a strong market trend, whilst a value below the zero line denotes a weak market trend.

When the price action forms Higher Highs but the CMF diverges with Lower Highs, indicating the market is overbought. This is a bearish reversal signal.

Similarly, a bullish reversal signal is likely to appear, signaling an oversold market, when the price action creates Lower Lows and the CMF is diverging with Higher Lows.

Chaikin Money Flow
Chaikin Money Flow – Bullish and Bearish Movement

Money Flow Index (MFI) Volume Indicator

MFI is another volume indicator that evaluates money flow by combining price and volume. MFI, also known as volume-weighted RSI, is quite similar to RSI. Money Flow Index is positive when buying pressure grows. Similarly, selling pressure rises as Money Flow Index declines. MFI varies from 0 to 100.

How to Interpret

If MFI increases above 75, the market is typically overbought. However, if MFI goes below 25, the market is oversold. These levels are used to spot possible price reversals.

When MFI exceeds 50, the uptrend is expected to continue. Similarly, if the MFI goes below 50, a downtrend is anticipated.

Near the overbought level, if the price makes Higher Highs but MFI makes Lower Highs, this divergence may indicate a bearish reversal.

If the price makes Lower Lows but is not confirmed by the MFI at the oversold level, this divergence may indicate a bullish reversal.

Money Flow Index
Money Flow Index – Bullish and Bearish Divergence

Conclusion

  • Trading Volume refers to the total number of shares traded during a given time period, which includes every share bought or sold during that time period. When an asset is actively traded, volumes are high. Similarly, if an asset is less traded, volumes are low.
  • A trader can analyze both price action and volume by looking at a candle volume chart, which combines volume with candlesticks. The volume decreases as the candle’s body gets smaller. Similarly, the volume increases with the increasing size of the candle’s body.
  • High-volume candles include Marubozu and engulfing patterns. Low volume candles are characterized by spinning tops and Doji patterns.
  • Another set of technical tools for assessing market strength is volume indicators. It is relevant to all time periods. The quantity of a volume depends on the length of a time period. The longer the time period, the higher the volume, and vice versa.
  • Top 5 volume indicators are – On balance volume, RSI volume, Accumulation/ distribution, Chaikin money flow and Money flow index
  • Volume price analysis technique is a popular price action tool in chart patterns trading.

Author is Senior Technical Analyst
At Bulls Arena Trading
info@bullsarenatrading
New Delhi
India

Author

  • Yash Nagarkoti

    Yash brings extensive trading knowledge and expertise in technical analysis. Specializing in short-term to medium-term trading, his research spans the Forex market to global stock markets. Since 2016, Yash has been a member of the bulls arena trading Technical Analysis Research Team.

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