Table of Contents
1. Introduction
Analysts of all experience levels champion the trading volume as a highly reliable and objective data source. Among several notable strategies it supplements is the breakout theory. How does the combo work exactly?
This concise blog post discusses the fundamentals and applications of the trading volume to secure success. As a bonus, readers will receive a ground-breaking indicator, which simplifies market operations significantly.
2. The Trading Volume Explained With Its Application in Breakout Strategies
True to its name, volume trading, regardless of how complex, depends on one primary tool – the trading volume.
The trading volume (or simply volume) is a graphical representation that estimates the extent of market activity (buying and selling) occurring at any particular time. It measures the total shares, contracts, or assets traded within a timeframe.
For example, imagine speculative traders bought and sold about 400 stocks of a Fortune 500 company within a minute. The volume will be 800 for that minute.
The precise value may matter little for analysis. Instead, most traders focus on its comparison to past and near-future results.
For this reason, leading platforms typically represent the volume on a bar chart superimposed on price data.
It becomes easier to understand how much or less it was at a particular period (depending on the set timeframe), especially with a candlestick chart.
Here is a sample chart with the invaluable statistical tool on TradingView:
The trading volume is significant because it is a quick and reliable gauge of how active a market is – high or low.
Studies prove that the higher the volume, the stronger the price moves due to the increased participation from investors. It can be bullish or bearish, but the former poses less worry to shareholders.
Conversely, low market participation and decreased interest result in lower volume – reduced certainty. Trend reversals and false breakouts become frequent in such situations.
That said, one can’t be entirely objective about how ‘good’ or ‘bad’ the volume is at any period. Each trader has a unique strategy and goal while considering other parameters, from indicator signals to price action chart points.
Hence, the trading volume at any time can be good enough for market participation.
2.1 Breakout Strategies With the Trading Volume
As discussed, the trading volume is one of many prominent technical data sources. Proponents have devised various inventive methods for its application, from trend confirmations to divergence analysis.
However, one of the best involves its fusion with breakout theories.
Breakouts refer to the price movement beyond a significant support or resistance level, typically with momentum.
When the indicator works to measure and confirm the momentum, most call the strategy a high-volume breakout technique since trend trading is best during increasing volume.
With this strategy, users can classify breakouts in three ways: false, continuation, and reversal.
False breakouts exist when the relative volume is low despite a price move beyond a key support/resistance level. The market will likely consolidate or reverse for as long as possible, putting traders who entered a trade at risk.
Continuation breakouts are the most anticipated because of the ease and reduced risk. The momentum above or below the significant levels is high (confirmed by an increased trading volume), whether bullish or bearish.
Conversely, expecting a reversal breakout is tense because it involves opening new positions in the opposite direction of a prevailing trend. It differs from a false breakout that reverses because the volume (signifying momentum) is relatively high.
2.2 How the High-Volume Continuation Breakout Strategy Works
Below is the simplified procedure of the high-volume continuation breakout strategy:
- Key Level(s) Identification: Support and resistance points are typically the best chart levels for anticipating breakouts. They could be swing highs, lows, PD arrays, etc.
- Breakout & Volume Confirmation: The market should test such key levels confirmed with a trading volume increase. It is a false breakout without momentum in market activity, and traders should avoid such opportunities.
- Trade Entry: After confirmation of the high-volume breakout, employ any reliable entry strategy to open new positions. For example, pullback and double-pullback traders may wait for retracements.
- Risk Management: Typically, traders place a stop order above or below the breakout candlestick. One must monitor the volume throughout the trade to know if the trend may be short-lived and act accordingly.
3. Striking Gold With the Revolutionary Volume Breaker for TradingView
False breakouts are quite challenging to distinguish in live conditions. The reasons in explicit cases may vary from wrong choices of key levels to improper timing.
However, several false breakout cases are inexplicable.
The most recommended solution to gain the upper in these occasions is Indicator Vault’s Volume Breaker for TradingView.
The tool operates a ground-breaking algorithm for the high volume required to confirm a breakout’s authenticity. It comprises price data and the Average True Range for this.
Succinctly, the following are a few benefits exclusive to every user:
- Awareness of true or false breakouts in the live markets
- Knowledge of the most potentially profitable trade exit points
- Freedom to access multiple instruments and financial markets
- Confidence in taking every opportunity owing to its ever-reliable alert system
Need to confirm for yourself? Try it here today and prepare to be mind-blown.
4. Conclusion
The trading volume takes almost every strategy, including the widespread breakout approach, to new heights.
As shared above, traders use the combination to open positions when the markets likely trend for a sustainable period.
Newbies and pros struggling with false breakouts should turn to the Volume Breaker for TradingView. Its working depends on the markets’ price data and ATR values.
Please share this article with every trading enthusiast and remember to share any questions or suggestions in the Comment Section.
