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Interpreting Volume Profile Trading

There are two factors that are used for designing most of the stock chart analysis; volume and the action of the stock price. In simple terms, volume is defined as the number of shares of a certain stock that exchange hands during a specific time frame. On a price chart, right below the stock price, a histogram is plotted for depicting the volume information of a stock. Chart readers can use this opportunity for to see the number of shares that are bought and sold for any given price. There are several ways through which the volume of a stock can be interpreted and some are mentioned below:


Stocks are usually considered as liquid investments. It takes a while for people to sell a house, which can be days or months, but selling stocks is quite easy and can be done in a matter of seconds. While people can buy and sell stocks in milliseconds, trading volume will determine how quickly people can sell it for a reasonable price. For instance, millions of shares of Apple Inc.'s stock are bought and sold by people on a daily basis. If investors wish to sell their shares of the company, they can sell them at the current trading price without any complications. However, what of the stocks that are traded only a couple of thousands shares daily? There are greater chances that the price of the stock will fall quickly because there aren't many buyers for it.


Investors and traders can glean a great deal of useful information by comparing the price of the stock with its trading volume. For instance, if there is a sudden increase in volume despite the fact that there has been a continuous down trend in stock, it is an indication that institutional investors are purchasing so the stock price is ready for an increase. When the volume is decreasing, but there is still a rise in stock price, it is an indication that institutional investors aren't participating in purchasing so there is a chance of prices falling in the near future. In this way, volume profile trading can help investors in making decisions about when to purchase and sell a particular stock.

Volume Indicators

A number of traders are unable to comprehend if the volume of a stock is representing selling or buying pressure in it. The good news is that programmers have come up with different types of volume indicators especially for stock chart programs that can be used by investors for interpreting high volume trading and low volume trading. Most software for soft chart allow traders to use several indicators on their price chart for ensuring a better understanding of the relationship between price and volume.

Program Trading

Institutional program trading contributes about 70% of the volume in the stock market. Computerized trading systems are used by hedge funds, banks and other institutional investors for buying and selling stocks. These programs are based on a complicated and secretive system of algorithms and allows trading of millions of shares of different types of stock simultaneously, enabling volume profile trading.

About Volume Trading

The number of shares that are traded of a particular stock is defined as its volume. This term is relevant to individual stock and stock markets as well. For instance, when the volume of the New York Stock Exchange on a certain day is said to be 1.7 billion shares, it means that this is the total number of shares that was traded on that particular day of all companies that are listed on the NYSE. This is the largest stock exchange in the world and it set a record on September 15th, 2008, when an aggregate of 8.14 billion shares was traded. It is essential to have knowledge about this tool before investors start trading volume. Here are some details provided:

Volume Reporting

This is done on a daily, weekly and monthly basis and is done in conjunction with daily, weekly and monthly charts. Furthermore, the average volume for the past 50 days is also calculated on a daily basis.

Volume Creates Liquidity

It becomes easier to buy or sell the shares of a particular stock if it has a high volume and it becomes even more efficient in pricing.

Volume as an Indicator

When the number of shares is multiplied by the share price, people will be able to calculate the total sum of money that exchanged hands on a specific day. For instance, if 50,000 shares of a $10 stock are traded on average, this means that the total is $500,000. If 1.7 million shares of a $50 stock are traded, the total will amount to $85 million. Institutional involvement is indicated in a particular stock through a large dollar volume. When the number of shares of a stock rise from 50,000 shares to 200,000 shares all of a sudden, this is an indicator of a change that has prompted the interest of investors.

Volume for Confirming Trends

The trend usually has an impact on the volume. An upward trend is confirmed when high volume causes the stock price to rise and low volume causes it to go down.

Volume Imbalances

On a normal day, the number of shares that are sought for purchase and offered for sale is more or less the same. However, there are situations when the number of shares that are available for sale is higher than the number of shares that investors are willing to purchase and vice versa. Price dislocations can be created by these imbalances and they cause the stock to go up and down. This can balance the buy and sell orders.

Bulls and Bears

Increasing stock prices coupled with rising volume is considered as bullish strategy in the stock market. It is called a bullish sentiment when stock prices are on a decline. Bearish sentiment is defined as the situation when stock prices decline on high volume. It will still be a bearish sentiment when volume drops, but there is a rise in stock price. High volume trades can be an excellent way of lending support when there are dramatic swings in stock prices.

Price Confirmation Through Trade Volume

If you have gone on a few blogs and websites about trading in the stock market, you must have noticed a very strong focus on the price of stocks. Traders, while focusing too much on price, completely forget to consider the aspect of volume. However, they forget the importance of volume profile trading and how high volume trading strategies could actually help them make profit from their investments too. You could always predict the movement of the market of a particular stock by looking at the relation between the price and volume of it. Base your strategies on this and you will profit from your investments.

Forex Signals

Increasing Volume And Decreasing Price

One relationship between price and volume is when you notice an increase in the volume of a stock but its price is falling. This shows that the buyers are becoming more interested in buying this particular stock because of the falling prices. Due to the falling prices the sellers will sell their shares as soon as possible to avoid a position where they have to sell their stocks at bottom prices, which is of course a loss for them. In short, if you are not a day trader and your investments are "long" by nature, it is time for you to exit the market.

Decreasing Volume And Increasing Price

Your move in this kind of a situation is pretty predictable on most occasions. You notice that the volume of previously high volume futures is going down but the price is increasing. You can still wait to sell your shares since the price will often rise a bit more in this occasion unless a point is reached where the reversal will take place. The reversal takes place when the activity will be at its minimum due to high prices and little to no demands. The price is then expected to fall to develop interest in the buyers.

Decreasing Volume And Decreasing Price

One of the most important things about volume is that it tells you about the liquidity of a particular stock. Decreasing volume and decreasing price is pretty much of an indication that there is not much activity on this particular stock. The interest is lacking and thus no significant changes in the price or volume of the trade will take place. There is a way to predict the future change in this condition but it still uncertain enough to avoid investing in the stock.

The way to predict a change in future is by knowing why there is lack of interest and from whose side. If the buyers are not interested in buying a particular stock the price is bound to keep on going down. It's up to you to decide your strategy based on that. However, if you were somehow able to find out that it's the sellers who are not showing much interest in selling their shares, the price might start to move up since we can see that there are buyers in the market and the increasing demand will increase the price eventually.