How to Analyze Trading Volumes of Stocks

Comprehensive Approach to Analyzing Stock Trading Volumes

Fundamentals of Stock Trading Volume

Trading volume measures the number of shares that have been exchanged between buyers and sellers over a specific period (typically a day). In terms of technical analysis, it serves as an indicator of activity and interest in a stock: increasing volume with rising prices confirms the strength of the upward trend, while decreasing volume during price drops indicates seller dominance. Particularly significant are periods of sharp volume spikes, which can precede market reversals or the commencement of new trends.

Volume is calculated using data from the exchange order book and trades recorded in the trading system. Tools such as MOEX DATASHOP provide precise statistics on Russian companies' stocks; similar providers exist for foreign platforms. It's important to compare the current volume with historical levels—for instance, with the 20-day average—to assess how activity deviates from the norm.

Types of Volume and Their Features

Vertical volume shows the dynamics of activity over time, while horizontal volume (Volume Profile) reveals at which price levels trades are concentrated. Cluster analysis or footprint charts represent an enhanced version, where the distribution of volume across individual prices is displayed within each candle. This allows traders to identify where buyers or sellers have been more aggressive within a range.

For instance, when testing a support level, the horizontal profile will show zones of maximum trading activity around the price where a "volume base" forms. During periods of strong movements, cluster analysis demonstrates where significant order absorption occurred and potential market maker manipulations took place.

Volume and Liquidity

High trading volume is a sign of liquidity: stocks with high daily turnover can be easily bought and sold without significantly impacting the price. Low-liquidity stocks may exhibit sharp price "jumps" even with relatively modest trading volumes. The concept of liquidity extends beyond simple volume: it also considers the spread between the bid and ask price, depth of the order book, and execution speed of orders.

Liquidity can change throughout the day: activity typically increases at the start and close of sessions due to institutional operations. News events (financial reports, macroeconomic data) stimulate sudden spikes in volume, temporarily increasing liquidity and leading to strong impulsive movements.

Volume in Confirming Trends and Reversals

Using volume to confirm trends is based on a classic rule: rising prices accompanied by increasing volume indicate trend strength; falling prices with decreasing volume suggest motion weakness. Conversely, if price is rising while volume declines, it may signal an impending correction.

When breaking key levels (for example, surpassing a previous high), it is crucial that the volume at that moment is significantly above average. Breakouts on low volume often turn out to be "false" and lead to a quick reversal of the movement. Volume analysis helps filter out such false signals and enhance trading quality.

Volume Indicators and Advanced Methods

For the convenience of volume analysis, various indicators exist:

• OBV (On Balance Volume) accumulates volume based on price direction, indicating whether there is accumulation or distribution.
• VWAP (Volume Weighted Average Price) shows the volume-weighted average price and guides institutional traders.
• Volume Profile visualizes volume distribution across price levels, identifying activity nodes.
• VSA (Volume Spread Analysis) combines volume, spread, and price bar analysis to assess market offerings.
• Delta and Cumulative Delta track the ratio of aggressive buys and sells within a cluster or session.
• Footprint Charts detail the transaction flow at price levels within each candle.

For example, divergences between OBV and price often precede trend reversals, while high VWAP values signal support from major players at current levels.

Large Trades and Institutional Volume

A significant portion of volume is held by large institutional players (funds, banks, market makers). These participants create volume spikes, and recognizing such "blocks" helps to understand where the market is headed. Data on large trades is published in broker reports or through specialized services such as MOEX DATASHOP.

Footprint charts and clusters allow tracking moments when volume is concentrated within a narrow price range, which often foreshadows an impulsive movement following a brief consolidation.

False Breakouts and Volume Traps

Even in strong trends, the market may exhibit "pseudo-breakouts"—movements beyond levels on low volume. Volume analysis allows for timely identification of such situations, preventing the opening of positions on fake signals.

During periods of consolidation, sudden spikes in volume that do not lead to a continuation of movement should be closely monitored. These represent classic "whipsaw" traps for traders without volume filtering.

Practical Market Case Studies

In 2022, on the Moscow Exchange, amid sharp sanctions expansions, the volume of Gazprom’s stocks increased by more than five times, partially confirming the trend and demonstrating active institutional selling. Properly interpreted volumes helped many retail traders avoid losses.

In 2020, on the NYSE, following the March market crash, the market rebounded with a strong volume response: technology company stocks showed growth with volume exceeding the monthly average, indicating support from institutional buyers and signaling the beginning of a prolonged trend.

Psychology of Volume in Trading

Volume reflects the psychological states of the market: panic, euphoria, caution. Mass entry or exit from positions results in volume spikes accompanied by emotional impulses. Understanding these processes helps traders maintain discipline and avoid mindless FOMO or over-optimism.

Systematic Application of Volume Analysis

For creating reliable trading systems, volume is integrated with other indicators: trend indicators, Fibonacci levels, candlestick patterns. It is recommended to test strategies on historical data, checking how volume confirmed signals and adapting rules to specific markets.

Conclusion

Analyzing trading volumes of stocks is a fundamental skill for traders and investors. A proper understanding of volume helps enhance the quality of trading decisions, filter out false signals, and identify key market moments. Combining volume analysis with technical patterns, psychological aspects, and risk management forms the foundation of a successful trading strategy in both Russian and international markets.