Bill Williams is the creator of some of the most popular market indicators: Awesome Oscillator, Fractals, Alligator, and Gator.
Volume Indicators In Trading For Beginners
2022-06-08 • Updated
Information is not investment advice
What Does Volume Mean in the Market?
In trading, the term "volume" represents the amount of money that has been spent for buying or selling a particular asset over a specific period. Traders rely on it as a key metric because it lets them know what an asset's liquidity level is.
Volume analysis is a technique used to determine the trades you will make by discovering the relationships between volume and prices.
Bullish signals from trading volume
Upside breakout with above-average volume
At some point, a price meets a resistance level during uptrends and in sideways markets. The trend stops and starts to fizzle as selling pressure overcomes buying pressure. When a price breaks through that level, the breakout will be more significant if the volume is high or above average. A breakout accompanied by low volume suggests enthusiasm for the move may be lacking.
Uptrend accompanied by increasing volume
An uptrend combined with an increasing and/or above-average volume shows an investor's enthusiasm for that asset, leading to more buying and even higher prices.
An uptrend with decreasing volume
An uptrend without increasing and/or above-average volume suggests a limited investor's enthusiasm, which signals an upcoming reversal.
Bearish signals from trading volume
Downside breakout accompanied by heavy volume
At some point, a price meets a support level during downtrends and in sideways markets. The trend stops and starts to fizzle as buying pressure overcomes selling pressure. When a price breaks through that level, the breakout will be more significant if the volume is high or above average. A breakout accompanied by low volume suggests low enthusiasm for the move.
Downtrend accompanied by increasing volume
A downtrend accompanied by increasing and/or above-average volume implies investors have doubts about the stock, which could lead to more selling and even lower prices. This is a great time for making sell trades.
A downtrend with decreasing volume
A downtrend without increasing and/or above-average volume implies limited investors’ concerns. While the price continues to fall, volume analysis traders may start watching for signs of an upcoming reversal supported by increasing volume.
As a rule of thumb, any price breakout or trend accompanied by above-average volume could be considered more significant than price movements that are not.
Three Volume Indicators
Volume indicators are mathematical formulas visually represented in the most commonly used charting platforms. Each indicator uses a slightly different formula, and traders should find the indicator that works best for their particular market approach.
There are many volume indicators to choose from, and the following provides a sampling of how traders can use several of them.
1. On-Balance-Volume (OBV)
On Balance Volume (OBV) measures buying and selling pressure. It’s a cumulative indicator that adds volume on up days and subtracts volume on down days. When the asset closes higher than the previous close, all of the day’s volume is considered up-volume. When the security closes lower than the previous close, all of the day’s volume is considered down-volume. The actual value of the OBV is unimportant; concentrate on its direction.
- When both price and OBV make higher peaks and higher troughs, the upward trend is likely to continue.
- The downward trend is likely to continue when both price and OBV are making lower peaks and lower troughs.
- If the OBV is rising during a trading range, accumulation may be taking place—a warning of an upward breakout.
- If the OBV is falling during a trading range, distribution may be taking place—a warning of a downward breakout.
- When price continues to make higher peaks, and OBV fails to make higher peaks, the upward trend is likely to stall or fail. It is called a negative divergence.
- When the price continues to make lower troughs and OBV fails to make lower troughs, the downward trend is likely to stall or fail. It is called a positive divergence.
2. Chaikin Money Flow
Chaikin Money Flow (CMF) is a volume-weighted average of accumulation and distribution over a specified period. The standard CMF period is 21 days. The principle behind the Chaikin Money Flow is the nearer the closing price is to the high, the more accumulation has taken place. Conversely, the nearer the closing price is to the low, the more distribution has taken place. If the price action consistently closes above the bar's midpoint on increasing volume, the Chaikin Money Flow will be positive. Conversely, if the price action consistently closes below the bar's midpoint on increasing volume, the Chaikin Money Flow will be a negative value.
- A CMF value above the zero line is a sign of strength in the market, and a value below the zero line is a sign of weakness in the market.
- Wait for the CMF to confirm the breakout direction of price action through trend lines or support and resistance lines. For example, if a price breaks upward through resistance, wait for the CMF to have a positive value to confirm the breakout direction.
- A CMF sell signal occurs when price action develops a higher high into overbought zones, with the CMF diverging with a lower high and beginning to fall.
- A CMF buy signal occurs when price action develops a lower low into oversold zones, with the CMF diverging with a higher low and beginning to rise.
3. Klinger Oscillator
The Klinger Oscillator is a financial tool that predicts long-term trends in money flow while detecting short-term fluctuations. In addition, it predicts price reversals in a financial market by extensively comparing volume to price.
As mentioned above, the Klinger Volume Oscillator consists of two lines and the centerlines. Usually, the two lines are usually red and blue. The blue line is the signal, while the red line is the Klinger.
As with most indicators with two lines, the key points to watch are when a crossover happens between the two lines. Another level to watch is when the two lines pass the centerline.
A buy signal usually appears when there is a crossover between the two lines below the centerline. On the other hand, a sell signal forms when there is a crossover between the two lines above the centerline.
Volumes have always been a significant indicator of the market’s sentiment. Just as Aroon or RSI indicators, volumes can help a trader confirm a breakout, spot an upcoming reversal, and find the price accumulation. Adding volumes to your trading strategy will improve trading results and decrease the number of mistakes.
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