For novices, the range of technical indicators, candlesticks, and chart patterns might be perplexing. Traders can, however, streamline and enhance their trading approach with the help of these tools. For instance, volume indicators let you assess both short- and long-term price changes.
Professional traders are familiar with several of the most widely used volume indicators, including the Chaikin Oscillator, OBV, MFI, A/D, and VWAP. However, what do they suggest? What kind of trading signals are offered by volume indicators?
Market players can visibly track the direction of money flow and the price response to this movement with the aid of volume indicators. Market players can identify more liquid levels and zones for an asset by using these tools, which speeds up the decision-making process for trades. Volume indicators validate current market patterns and indicate price reversal points.
You will discover how to use these indicators into your trading strategy and boost your profits in this post.
The following topics are covered in the article:
- Key points
- Top Volume Indicators for Trading
- Concepts of Volume Analysis
- Volume Indicators in Trading
- Using Volume Analysis
- Conclusion
- FAQ’s
Key point | Description |
Principal idea | Volume indicators give traders access to information about supply and demand, price-volume dynamics relationship, liquid support and resistance levels, and more advantageous price reversal moments. |
Volume indication definition | Instruments that show data regarding current trading activity, or more specifically, the quantity of contracts being traded. |
Effect on the marketplace | Volume indicators provide information about buyer and seller activity. Price dynamics and market sentiment are subsequently impacted by this. |
How volume indicators are used in trading | To verify a signal, volume indicators must be employed with additional technical analysis tools. In trading, a signal is sent to traders prior to a change in price. |
Qualities of the values on the volume indicator | An indication of an impending strong price movement in one direction is the establishment of divergence, which is the difference between the values of the indicators and the price. |
Utilizing Volume Indicators in Trading Strategies | Mark levels of support and resistance on your chart and include a volume indicator. Examine these levels in relation to the price chart’s lines. Open a trade in the same direction if the price breaks through the level. |
Benefits and drawbacks of utilizing volume markers | Although volume indicators might be useful in verifying an asset’s performance, they might not always be able to predict a significant price change ahead of time. |
Periods | Although the tool provides a more precise signal on higher time frames, volume indicators can be used on different time frames. When trading intraday, traders can employ volumes, but there is a considerable risk involved because of the amount of market noise. |
Zones of stop loss | Stop loss levels are situated either above or below liquid zones of increasing volume and important zones. |
Top Volume Indicators for Trading
Let’s examine the best and most widely used volume indicators. They can be applied to any time frame in the Forex, cryptocurrency, and commodity markets by market players.
The volume indicators listed below are used by investors and traders in their trading strategies:
- A traditional indicator that correlates with price changes on the chart is On Balance Volume (OBV). It shows the volume in balance and how it affects the price over a given time frame.
- The Money Flow Index (MFI) shows the dynamics of an asset’s cash inflow and outflow. Other than the fact that it also examines market volumes, it is comparable to RSI.
- The distribution and accumulation of an instrument’s supply and demand are shown by its A/D ratio. Market players can ascertain the correlation between price and volume fluctuations by utilizing this indicator.
- By accounting for weighted average trade volumes, the Volume-Weighted Average Price (VWAP) shows the average price for a certain time period.
- The Chaikin Oscillator displays indications of improving price dynamics, trend reversals, and the intensity of the trend direction.
Let’s take a closer look at each of these volume indicators.
Volume on-Balance (OBV)
Joseph Greenville created the OBV indicator in 1963. In his book “New Key to Stock Market Profits,” he initially discussed it. Trading volume, in Greenville’s opinion, is the primary factor influencing market movement. The primary factor that traders and investors should consider before making a trade is market volume.
The intensity of cash flows in an asset is ascertained using OBV. This sign is employed:
- The volume of each new candle that closes in the chart higher than the preceding one is added to the overall cumulative volume.
- On the other hand, the volume is deducted from the overall volume if the subsequent candle closes below the present one.
The cumulative total is shown as a positive or negative value in the curve chart.
The indicator’s fundamental tenet is that changes in the values of the OBV indicator occur before changes in the chart’s price. According to Greenville, a major surge in asset quotes is likely to occur if impulsive swings of market volumes occur without any notable price adjustments in the chart. The explanation for this phenomena is that when smaller traders sell off the asset, major players accumulate buy trades.
Put simply, when a large player hoards an asset, trade volume rises and the price now goes sideways. Depending on the accumulation targets set by large traders, an impulse price movement occurs either up or down once major players have acquired a sufficient number of long or short trades.
Index of Money Flow (MFI)
In 1978, John Welles Wilder published New Concepts in Technical Trading Systems, which included the first mention of the MFI indicator. Traders and investors can monitor the dynamics of money flowing into an asset over a certain time period by using this technical indicator.
Traders can ascertain the purchasing and selling pressure on the price from bulls and bears by observing the indicator value, which ranges from 0 to 100. MFI’s primary purpose is to assist traders in locating potential reversal points for the instrument as well as price levels in overbought and oversold areas on the chart.
The indicator also displays the difference between price and volumes, which indicates a divergence and an impending instrument trend reversal. Professional traders typically employ MFI on time frames starting with H1 and higher.
It should be mentioned that the indicator values may stay in overbought or oversold zones for an extended period of time during a strong trend. Follow these steps to prevent false signals:
- When the price exits the upside oversold zone and the indicator values start to rise, then is the time to enter buying. This suggests that the asset has a positive cash flow;
- In the same manner, but in the other direction, open short transactions. An asset’s funds are leaving it when the price breaks out of the overbought zone to the downside.
Utilize MFI in conjunction with candlestick and chart patterns, as well as additional technical indicators.
Accumulation/Distribution
The purpose of the A/D indicator is to calculate market trade volume. It was first created with the stock market in mind. Later on, nevertheless, market players started utilizing A/D as a preventative measure in other marketplaces.
The similarities between the OBV indication and the A/D indicator should be underlined. This is so because, using the correlation between closing prices and the highs and lows of the chosen range, A/D also displays the flow of money into and out of an asset.
On the price chart, the A/D indicator offers the following confirmations and signals:
- An increasing value of the indicator validates upward dynamics.
- A downtrend is confirmed by a declining indicator value;
- An asset’s bearish divergence development indicates a potential reversal of the downward trend. When asset quotes are rising but the indicator values contradict this movement, it also points to a downward reversal;
- A bullish divergence forming indicates that buying is warranted. When an instrument’s quotes decline but the indicator’s movement does not support this, it is suggested that an upward reversal is occurring.
The average price of volume weighted (VWAP)
Similar to a SMA, which computes an asset’s weighted average price based on trading volumes, is VWAP. An indicator known as a SMA displays the average value of a particular kind of price over a predetermined number of time periods.
Similar to SMA, the Volume Weighted Average Price indicator generates the following signals:
- The asset price is above the indicator lines when there is an upward tendency;
- The traded instrument’s quotes are below the Volume Weighted Average Price lines during a decline.
VWAP provides one more way to confirm trends. It can be applied in conjunction with candlestick and chart patterns, as well as the SMA. The indicator serves as a dynamic level of support or resistance from which a rise in price is reasonable. It’s important to remember that Volume Weighted Average Price is used to spot patterns.
The following values should be set to obtain more ideal results:
- duration: 20
- the (Max + Min)/2 source.
Chaikin Currency Flow Indicator
Early in the 1970s, the Chaikin oscillator was invented. Its foundation is the popular A/D (Accumulation/Distribution) indicator’s structure. The oscillator determines the difference between 3 EMA and 10 EMA using the A/D indicator.
EMA stands for exponential moving average, which is more responsive to recent changes in the price of an asset than the SMA is. The dynamics of quotes are smoothed out using EMA, which emphasizes recent prices more.
Data regarding trading volume is also taken into consideration by the Chaikin oscillator. This makes it possible for market players to use developing divergences to monitor possible price reversal indications. When the market is rising, a positive divergence between the oscillator values and quotes on the chart indicates a buy indication; when the market is falling, a negative divergence indicates a sell signal.
It is important to remember that signals pointing in the oscillator trend’s direction are more trustworthy than those pointing in the other direction. It is preferable to utilize the Chaikin oscillator in conjunction with RSI or Stochastic as well as the Bollinger Bands indicator to get more precise information about the asset being traded.
Concepts of Volume Analysis
These days, volume analysis in financial market trading can be done in a variety of ways. The study of volumes receives special emphasis in trading because it demonstrates the link between supply and demand, which forms the foundation of financial markets.
More accurate forecasting of the asset price dynamics in both higher and lower volatility scenarios is facilitated by proficient and efficient volume analysis.
The quantity of units of an asset—such as stocks, contracts, or lots—that are purchased and sold within a predetermined window of time is known as the trading volume. Market players can recognize patterns and trends that emerge from their operations by analyzing volume data. Two primary categories of trade volumes exist:
1. Volume of ticks
The basis for tick volume is the frequency of price movements or changes over a given period of time, which represents market activity and liquidity. It is computed as the minimal price fluctuation, or the total number of price variations during a single tick. A completed trade that appears on the chart is called a tick.
The quantity of price swings on the chart—rather than the direction of price movement—is what counts for tick volume. Consequently, when:
When there is no market volatility and little to no price movement, tick volumes display low levels;
- Tick volume values rise when market volatility is high and the price actively moves in both directions.
- Analyzing tick volumes on earlier timeframes from H4 and upwards is advised.
2. The amount of money or contract
the conventional style of books that were published at the start of the previous century. The quantity of funds or executed trades in the market defines this volume. The outcomes are the same in both. On the other hand, when it comes to monetary volume, investors and traders can do a financial comparison between the quantities of different instruments.
The benefit of this kind of volume is that the exchange considers each trade individually. For a complete picture, information from other trading platforms can be added to the volume that each platform creates.
Volume Indicators in Trading
These indicators, which provide signals about impending price movements, are based on data regarding the traded volumes of an item during a specific time period. As a result, traders are able to make more informed judgments and access more precise information about the traded instrument.
Most technical indicators first emerged and evolved in the contemporary trading environment. The same applies to volume indicators. A significant advancement in science and technology made it feasible to automate the volume calculation process. The computation results are available to traders as a curve or chart of numerical numbers.
Volume indicators support the trend’s robustness as well. However, there are times when it is challenging to ascertain future price dynamics; in these cases, volume indicators aid in providing context. Particularly during a long-term trend, declining volumes could be a sign of an opposite trend reversal. This reduces the substantial danger of financial loss as well.
Recall that a financial asset’s volume is its capital input or outflow. As a result, in addition to technical examination of market quantities, other considerations such as statistical, geopolitical, and economic aspects must be made. The intensity of huge funds in an asset is directly impacted by these fundamental characteristics.
Using Volume Analysis
The market is full of trading methods that combine oscillators and trend indicators with tools for volume analysis. Volume indicators are therefore typically auxiliary and function to validate the signals of the primary analysis tools in the trading method.
During a financial market trading session, the following volume indicator indications are recognized:
- The asset is trading at high volumes, and its price is rising gradually. This suggests that a long-term trend for the instrument is emerging. In this situation, one must search for points of entry that point in the trend’s direction;
- At important support and resistance levels, there is an impulse increase in market volumes accompanied by slight price swings. This indicates to market players that an asset correction is probably coming. This might signal the start of a trend reversal on longer timescales;
- Low market volumes and a sharp price change are seen. Here, a signal for a swift trend reversal is provided. Typically, an instrument’s trend concludes with a significant shift, at which point the asset prices start to reverse.
The best volume indicator overall?
After examining the top five volume indicators for day traders, it is important to note that each of them performs well in technical analysis. First and foremost, though, the trading system and approach determine how effective the instruments are.
The best and most informative analysis tool is the OBV (On-Balance Volume) indicator. It shows the accumulation of long or short trades, where the values of the instrument rise or fall, correspondingly. The OBV is the best volume indicator because of these numbers, which enable market participants to receive trade indications on the indicator beforehand.
OBV (On-Balance Volume), in particular, validates the trend for a traded item. However, it can also forecast the asset’s subsequent consolidation tendencies. In other words, the tool gives market players the ability to predict the point at which the price will leave the sideways movement.
Conclusion
Indicators of market volume are an effective tool for examining and projecting future price dynamics. The market’s supply and demand balance is mostly determined by trading volumes.
When combined with fundamental analysis, volume indicators in a trading strategy enable market players to precisely predict the direction of the price impetus from the flat. Furthermore, instruments for analyzing market volume will support the verification of the present trend, including its start, finish, and reversal.
It is advised to use candlestick patterns, chart patterns, and other technical tools in addition to volume indicators. Market players will be able to more precisely identify the best times to enter a trade, when to take a profit, and where to place stop losses.
You can test volume indicators on a comprehensive platform from the top broker on the market, Lite Finance, for free in order to successfully incorporate them into your trading plan.
FAQ’s
What is the most accurate indicator?
- On-Balance Volume is the most accurate volume indication. Its values provide more useful information while deciding what to trade.
What is the operation of volume indicators?
- The indicators display the total market volumes throughout all timeframes correlated with the price on the chart. They show the quantity of trades that have been executed, enabling traders to ascertain additional price dynamics.
Which metrics quantify the magnitude of the market?
- Among the most widely used volume indicators in Forex trading are the Chaikin oscillator, OBV, MFI, A/D, and VWAP. Tick volumes and the Volumes vertical volume indicator are among the most often utilized as well.
Why is it crucial to consider trade volumes?
- Future price changes are mostly determined by trading volumes. Because market volumes directly affect asset prices, they should be taken into account while making trading decisions.
Which forex volume indicator is the best?
- When trading on the Forex market, traders most frequently employ the Volumes indicator and tick volumes. However, the use of other well-known stock market indicators has become feasible due to advancements in technology and financial markets. The OBV indicator is the best of them.