How Volume and Volume Divergence Can Enhance Your Trading Strategy

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How Volume and Volume Divergence Can Enhance Your Trading Strategy banner

For traders interested in short-term market movements, price-based indicators have become the holy grail of technical analysis. In the sea of price-based analytical tools available, many traders make the costly mistake of ignoring trading volume. However, if you want to become a better trader and implement more effective trading strategies in the market, you need to factor in the trading volume as well as the volume divergence.

Not sure what these technical indicators are? In that case, all you need to do is keep reading because, in this article, we take a deep dive into what trading volume and volume divergence are and how they can be used to make your trading strategies more effective.

What is Trading Volume?

The trading volume is the number of securities traded in the financial market during any given period. For equity shares, the volume of trading is expressed in terms of the number of shares traded. For derivatives like options and futures, the trading volume is measured as the number of contracts exchanged between buyers and sellers in the market.

Although it is quite a straightforward measure, the trading volume is one of the most fundamental technical indicators available for traders. It is often analysed in conjunction with a security’s price action. This can help you better understand how interested or not traders are in buying or selling the security.

What Does the Trading Volume Indicate?

The trading volume is essentially a measure of the level of activity and liquidity in a stock or security. A higher volume of trade indicates that the security is more actively bought and sold in the market, while a low volume may mean that the level of trading activity is low for the security concerned.

Higher trade volumes are generally considered to be a positive sign because it means you can sell or buy the stock more easily. It translates to quicker order execution and shorter wait times in the market. A high trading volume for a stock is also typically accompanied by a narrow bid-ask spread because buyers and sellers are both eager to enter into transactions.

How to Use Trading Volume to Enhance Your Trading Strategy?

The trading volume can be pivotal to formulating your trading strategy. Here is how you can use information about the volume of trades to enhance your strategy and potentially improve the outcomes.

  • Trend Confirmation

The trading volume can help you confirm the direction and the strength of a prevailing price movement in the market. If the volume is increasing when the price rises or decreasing when there is a short pullback, it indicates that the prevailing uptrend is strong. Conversely, if the volume increases in a bearish market and decreases slightly in case of temporary rallies, it means the downtrend may continue.

  • Identifying Reversals

While high trading volume is generally indicative of a strong prevailing trend, you need to check if it is unusually high. Such abnormally high volume, especially if it occurs suddenly, may signal a potential trend reversal. For instance, if a stock is in a downtrend and you suddenly notice a spike in the trading volume along with a minor price rally, it may indicate that buyers have entered the market and are steering the price upward.

  • Breakouts and Breakdowns

The trading volume is also critical for creating trading strategies involving price breakouts or breakdowns. A breakout occurs when the price of a stock breaches the resistance level and moves upward, while a breakdown occurs when the price goes past the support level and moves downward. When a breakout (or breakdown) is accompanied by a surge in trading volumes, it generally indicates that the new bullish (or bearish) trend may be sustained.

  • Volume Averages and Volume Indicators

To better understand the typical baseline trading volume for a stock or security, you can make use of moving averages like the Simple Moving Average (SMA) or Exponential Moving Average (EMA). These averages help smooth out the daily trade fluctuations and give you a clearer picture of the volume trend. Also, using volume indicators like the Volume Price Trend (VPT), On-Balance Volume (OBV) and or Accumulation/Distribution Line (ADL) in your analysis can help you finetune your trading strategy.

What is Volume Divergence?

The trading volume is closely tied to the price of securities. Normally, if the trading volume and the price of a stock or security are moving in the same direction, it is easy to spot strong or weak trends. However, if the trading volume and the price are moving in opposite directions, it results in volume divergence.

Simply put, volume divergence is a phenomenon where the stock’s price is trending in one direction but the trading volume is trending in the opposite direction. When you encounter such a situation in the market, you may be unsure about how to tweak your trading strategy to leverage this dichotomy. However, once you understand what volume divergence indicates, you can tailor your trading strategy to capitalise on opposing price-volume movements.

What Does the Volume Divergence Indicate?

To understand what volume divergence in the market could signify, you need to first identify the type of divergence, which may be bullish or bearish. Let us take a closer look at each of these volume divergence scenarios.

  • Bearish Volume Divergence

A bearish volume divergence occurs if the stock price is increasing but the stock’s trading volume is simultaneously decreasing. This means that although the price is rising, not many traders believe that this momentum can be sustained. So, the number of buyers interested in the stock decreases, leading to low trading volumes. Eventually, the bullish momentum may weaken and the price could reverse downward.

  • Bullish Volume Divergence

A bullish volume divergence is the opposite of a bearish volume divergence. Here, the stock price is falling, but the trading volume is simultaneously increasing. This means that although sellers are driving the price down, buyer activity is also building, leading to a higher number of fulfilled traders (and therefore higher volumes). Eventually, this may cause a trend reversal and drive the price upward.

How to Use Volume Divergence to Improve Your Trading Strategy?

Like the trading volume, data about volume divergence is also crucial for improving your trading strategy and elevating the outcomes of your trades. Here are some ways in which you can use the volume divergence to improve your strategy.

  • Identify Volume Divergences

Start by spotting discrepancies between price movements and volume trends. If the prices are climbing but the volume is falling, you need to tailor your trading strategy for a bearish volume divergence and consider selling or reduced buying. This is because the uptrend may not be supported by strong demand and could reverse. Conversely, in a bullish volume divergence when the prices are falling while volume is increasing, you may need to adjust your trading strategy and prepare for a long position. This is because, despite the price drop, there is buying interest that could lead to a price reversal upward.

  • Combine it with Price Action

Integrate volume divergence analysis with price action for a more holistic trading strategy. Look for patterns like head and shoulders, double tops or double bottoms in the candlestick chart for more insights. For example, if you notice a double top pattern with decreasing volume on the second peak, this could reinforce the bearish volume divergence signal and suggest that there is a stronger potential for price reversal.

  • Make Use of Technical Indicators

Volume divergence analysis can be greatly enhanced if you use technical indicators like moving averages, RSI or MACD. For instance, if you observe bearish volume divergence and the RSI is also showing overbought conditions, this could be a strong signal to consider selling or shorting the asset.

  • Set Clear Entry and Exit Points for Your Trade

Use the insights from volume divergence to set strategic entry and exit points. For instance, if you detect bullish volume divergence and if other indicators confirm the bullish signal, you need to consider entering a long position near the price low. Conversely, bearish volume divergence could be a signal to enter a short position near the price high, especially if other indicators support a bearish outlook.

  • Risk Management

To ensure that your trading strategy is optimised for minimal risk, consider implementing strict risk management rules. This will protect your trade from false signals or unexpected market moves. One of the most effective ways to do this is to set stop-loss orders based on technical support/resistance levels or as a percentage of your trading capital to limit potential losses.


With various technical and divergence indicators available, it is easy to overlook the importance of trading volume and volume divergence. However, these fundamental tools can enhance your trading strategy greatly by offering you crucial insights about price direction and momentum.

So, the next time you open your price charts to study the market and plan your trade, make sure you also look into the trading volume data for a more holistic view of the markets. With price-volume charts readily available to traders on intuitive platforms like the Samco trading app, studying trading volume and volume divergence to plan a trade is now easier than ever before.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - Research Analysts -SEBI Reg.No.-INHO0O0005847

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