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Buying and Selling Volume

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Volume is the number of contracts (or shares, or forex lots) that are traded during a particular time frame. For example, daily volume is the number of contracts that are traded during one trading day. High volume is an indication that a market is being actively traded, and low volume is an indication that a market is less actively traded. High volume is often associated with high volatility (a large price range), because the increased trading activity can keep the price moving in the same direction for a significant amount of time. Volume is often shown on graphical charts along with the price, and is usually shown per price bar (i.e. an hourly chart would show the hourly volume).

Buying and Selling Volume

Total volume is made up of buying volume and selling volume. Buying volume is the number of contracts that were associated with buying trades, and selling volume is the number of contracts that were associated with selling trades. However, this is often confusing for new traders because every trade requires both a buyer (a trader that is buying a contract) and a seller (a trader that is selling a contract). As every trade requires that a contract is being both bought and sold at the same time, it does not seem possible that a trade could be classified as either buying volume or selling volume.

Bid and Ask Volume

The reason that it is possible to classify a trade as either buying volume or selling volume is based upon how the trade affects the current price. Every trade occurs at a single price, and with few exceptions, that price is either the bid price or the ask price. Volume that occurs at the bid price is known as bid volume. Bid volume is selling volume because it has the potential to move the price down, due to the bid price being lower than the ask price. Conversely, volume that occurs at the ask price is known as ask volume. Ask volume is buying volume because it has the potential to move the price up, due to the ask price being higher than the bid price. Therefore, trades that occur at the bid price are considered selling volume because they help the price move down, and trades that occur at the ask price are considered buying volume because they help the price move up.

More Buyers or Sellers

When a market is experiencing more buying volume than selling volume it means that there are more traders buying at the market price (which in this case is the ask price). Similarly, when a market is experiencing more selling volume than buying volume it means that there are more traders selling at the market price (which is this case would be the bid price). Market dynamics generally dictate that when there are more buyers than sellers, the price should move up, and that when there are more sellers the price should move down. However, the number of buyers and sellers can change at any moment (and often changes many times even in short time frames), and this is what causes the markets to move in upward and downward waves rather than only in one direction.

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