Trading volume is measured by the number of specific financial asset being traded in a given amount of time. In the context of futures contract, trading volume is measured by how many contracts were being traded in a specified period of time.

Trading volume can be served as an excellent indicator for trader to get an idea of the strength for the specific trading asset or the market in general. An increase in trading volume usually signal a strong momentum for a particular security going into a certain direction. For example, the stronger the security going into an uptrend, the higher the volume of that particular security.

How Trading Volume Help You to Make Decision

Increase in price followed by the decrease in volume is a warning sign of a potential reversal, which suggest a lack of interest from the market. Another strong indicator of price reversal is following the price move higher or lower, there is a heavy volume and little price movement.

Example

If John want to buy a X asset, which has saw a 50% increase in price over the past 3 three months. However, John is not sure that whether the X asset will continue to rise in the future. John performed a volume analysis for the X asset, and he found out that the trading volume of X asset is in the uptrend and, has increased steadily over the past months. The volume analysis gives John a big confidence that the X asset has the necessary momentum to rise higher in the future.

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