How it works
Volume is the quantity that changed hands during a bar: shares for equities, contracts for futures and options, base-currency units for most crypto pairs. It is the only series on a normal chart that is not derived from price, which is why it carries independent information. Price tells you where buyers and sellers agreed; volume tells you how much business was done at that agreement.
The single most common misconception is that volume measures buying or selling pressure. It cannot: every transaction has a buyer and a seller in equal size, so the totals always balance. What volume actually measures is participation and urgency. A large number means many holders changed their minds at that price level; a small number means the price drifted with few people willing to act on it. The direction of that interest has to come from somewhere else — from where the bar closed inside its range, from the sequence of closes, or from order-flow data that most retail feeds do not carry.
Practically, traders read volume in relative terms rather than absolute ones. A moving average of volume, twenty periods being the usual choice, supplies the baseline; the useful question is how many times normal the current bar is running. Breakouts are trusted more when the bar that clears a level trades well above that baseline, because a move through an empty book reverses cheaply. Consolidations are expected to dry up, and the contraction itself is information: activity draining out of a range often precedes the expansion out of it. At the other extreme, one enormous bar after an extended run is a classic exhaustion tell, the point where the last group of participants finally transacts.
Volume also has a shape within the day and the week that is easy to mistake for a signal. Equity turnover is heaviest in the opening and closing auctions and thinnest around lunchtime; index rebalances, option expiries and earnings reports produce single sessions many multiples of normal that have nothing to do with the trend. Comparing a bar with the same bar of previous sessions, rather than with a flat average, avoids most of that trap.
Everything else in this family is a transformation of this series. On-Balance Volume signs it by the close, the Accumulation/Distribution line weights it by where the close sat inside the bar, VWAP uses it to weight price, and volume profile redistributes it onto the price axis. Understanding what the raw histogram does and does not say makes the derived tools much easier to judge.
Calculation
The arithmetic in words, in the order it happens.
The bar's volume is the total quantity traded during that bar's period, taken straight from the exchange or aggregator feed and drawn as a histogram from a zero baseline. No smoothing, normalisation or scaling is applied. Charts conventionally colour each bar by direction — comparing the close with the bar's own open, or optionally with the previous bar's close — and overlay a moving average of volume, most often a 20-period simple average, so the current bar can be read as a multiple of recent normal activity.
Source
An AlgoBeamScript implementation of the formula above, written by us from the arithmetic so the code and the calculation agree line for line.
Runs unchanged on the platform and in the AlgoBeamTS runtime. The language reference is in the documentation.
Inputs
Defaults are the values most charting packages ship with. They are conventions, not optimal settings — the right length depends on your instrument and your holding period.
| Input | Default | What it changes |
|---|---|---|
| Volume MA length | 20 | Length of the moving average drawn over the histogram, which defines what counts as normal activity. Shorter settings such as 10 make the baseline track recent quiet or busy stretches and so flag fewer bars as unusual; longer ones such as 50 hold a stable reference across a whole regime. |
| Colour based on previous close | Off | When off, a bar is coloured up if it closed above its own open. When on, it is coloured up if it closed above the previous bar's close. The second rule matches how On-Balance Volume and Net Volume sign their input, so turn it on if you want the histogram colours to agree with those lines. |
| Moving average type | SMA | Simple averaging treats every session in the window equally, which is usually what you want for a baseline. An exponential average reacts faster to a change in activity regime but is dragged around by single outlier sessions such as expiries. |
How to read it
What practitioners take from the plot. Read these as descriptions of market state, not as entry signals.
- A breakout bar trading well above its volume average
- The level was cleared with real participation rather than drift. It does not guarantee follow-through, but breaks on thin volume fail far more often, so this is a minimum condition rather than a signal in itself.
- Volume contracting steadily inside a range
- Disagreement is being exhausted and positions are settling. Quiet ranges tend to resolve into expansion; the histogram says nothing about which way, which is why it is paired with a structural or directional rule.
- Price making new highs on progressively lighter volume
- The advance is being carried by fewer participants. This is a warning about the quality of the move, not a timing tool, and it can persist for a long time in a low-float or heavily indexed instrument.
- A single bar many times the average after an extended move
- Climactic activity. Either the last buyers are being filled at the top of a run or a large seller is being absorbed at the bottom of one; check where the bar closed inside its range to tell which.
- Huge volume with a narrow range and a close near the middle
- Absorption. A large amount changed hands without moving price, which means someone was willing to take the whole flow. The level involved usually matters afterwards.
Limitations
Where this indicator misleads. None of these are fixed by a better parameter.
- Volume is directionless by construction. Every trade has a buyer and a seller, so the histogram can never show pressure on its own — the sign always has to be imported from price, and every method of doing that is an approximation.
- Reported volume is not one clean number. Equity trading is fragmented across lit venues, dark pools and off-exchange internalisers, and how much of that reaches a given chart varies by feed. In crypto, volume is per-venue and some of it is not real.
- Spot forex has no central exchange and therefore no true volume; what charts show is a tick count, which correlates with activity but is a different quantity and cannot be compared across brokers.
- Calendar events — index rebalances, quarterly option expiry, earnings, holiday half-sessions — produce extreme readings that carry no trend information at all, and they distort any moving average of volume for weeks afterwards.
Educational reference. This page explains how an indicator is built and how it is commonly read. It is not investment advice, not a recommendation and not a signal service. No indicator is profitable on its own — each is a way of describing a market, and any rule built on one has to be tested with realistic costs before it is traded.