Very few traders or investors know how to
use volume to increase their profits and minimize
risk, and this is very strange because volume
it is a very powerful tool but is often overlooked.
Also, volume information can be found on any
trading platform, but strangely few traders
or investors know how to use this information
to and maximize profits.
Volume is a not a precise entry and exit tool,
however, with the help of some volume indicators,
you can generate decent entry and exit signals
by combining them with price action or other
tools.
So, today, we’ll talk about volume indicators,
you’ll learn why they are such a useful
tool and you’ll discover what are the best
volume indicators to incorporate in your market
analysis.
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Volume indicators are mathematical formulas
that are visually represented in almost all
trading platforms.
Each indicator uses a slightly different formula,
and therefore, you should find the indicator
that works best for your particular market
approach.
Volume indicators are not 100% required, but
they can help you a lot in your trading decision
process.
There are many volume indicators, and let’s
discuss briefly about the most important ones.
The first indicator, average volume.
The most basic of all volume indicators is
the average one, and the calculation most
commonly used for the stock markets is 50
days, although it may be reasonable to use
the same period as the price average that
is being used.
Then, if you are tracking the 200-day moving
average for example, a 200-day average of
the volume would make sense.
Anything less than 50 days is not likely to
be smooth.
Another useful indicator, not known by many
trades is the volume momentum.
The volume momentum indicator treats volume
as it would be price.
For momentum, this means finding the change
in volume over a specific time interval; volume
momentum basically measures the size of the
volume change relative to the starting value.
The indicator sorts the volume based on negative
or positive closes.
This indicator works in all timeframes but
is quite strong in the smaller ones to notice
buying or selling power taking place.
Force index is another great volume indicator
and represents the change in price multiplied
by the daily volume.
Force index is an oscillator that measures
the force, or power, of bulls behind particular
market rallies and of bears behind every decline.
The force index indicator will be positive
or negative if the price change was higher
or lower.
The three key components of the force index
are the direction of price change, the extent
of the price change, and the trading volume.
A higher market will result in a positive
force index, plotted above the center line;
A lower market points to a negative force
index, below the center line.
An unchanged market will return a force index
directly on the zero line.
When the force index is used in conjunction
with a moving average, the resulting figure
can accurately measure significant changes
in the power of bulls and bears.
For timing entries and exits, a 2-day exponential
moving average (EMA) is recommended, to avoid
unnecessary noise in the indicator.
For longer-term analysis, a 13-day exponential
moving average could be used.
Volume oscillator is another useful tool.
The volume oscillator consists of two moving
averages of volume, one fast and one slow,
the fast volume moving average being subtracted
from the slow moving average.
An increase or decrease in price accompanied
by an increase in volume may be considered
a sign of strength in the prevailing trend.
Therefore, when the fast volume moving average
(default 14-period) is above the slow volume
moving average (default 34-period), the volume
oscillator is above the zero line and may
be confirming price direction, whether it
be up or down.
An increase or decrease in price accompanied
by a decrease in volume may be considered
a sign of weakness in the prevailing trend.
Therefore, when the fast volume moving average
is below the slow volume moving average, the
volume oscillator is below the zero line and
may be warning that the price direction is
lacking strength and conviction.
The next indicator is a familiar one, because
i mentioned it in my past videos, and that’s
the on balance volume.
On balance volume (OBV) combines price and
volume in an attempt to determine whether
price movements are strong or are weak and
lacking conviction.
On balance volume has a simple calculation:
On an up day, the volume is added to the previous
day’s OBV
On a down day, the volume is subtracted from
the previous day’s OBV.
Increasing or decreasing price accompanied
by increasing volume, suggests a confirmation
of the price trend.
Increasing or decreasing price accompanied
by decreasing volume, suggests that the price
movement is weak and lacking conviction.
The next indicator is the money flow index.
The money flow index (MFI) is a momentum oscillator
that measures the strength of money flowing
in and out of a security/stock.
Money flow index is related to the relative
strength index, but with a twist.
While RSI only incorporates prices, the money
flow index also incorporates the volume.
As the money flow index (MFI) is quite similar
to RSI, the indicator can be used in a similar
way.
When the MFI is above 90, the price is considered
overbought and a reversal or pullback could
be on the cards.
When the MFI is below 10, the price is considered
oversold and a reversal or pullback might
occur on the market.
Since the money flow index uses volume in
its calculation, this indicator can be effective
as a divergence indicator.
If prices rise, but the volume on the up days
is less than the volume recorded on down days,
then money is secretly pouring out of the
stock; this is called a bearish divergence.
And similarly, when prices fall, but the volume
on the down days is less than the volume on
up days, then money is flowing back into the
stock, and that’s a bullish divergence.
Accumulation and distribution indicator is
next.
If you watched by pivot points strategy, you
already know a few things about it.
The A/D line compares the strength of the
close compared to the open divided by the
trading range.
It is also called money flow in some references.
Accumulation distribution uses volume to confirm
price trends or warn of weak movements that
could result in price reversals.
Accumulation: volume is considered to be accumulated
when the day’s close is higher than the previous
day’s closing price.
Thus the term “accumulation day”
Distribution: volume is distributed when the
day’s close is lower than the previous day’s
closing price.
This is also known as a “distribution day”
The main use of the accumulation distribution
line is to detect divergences between the
price movement and volume movement.
Another indicator is the price volume trend.
This indicator combines percentage price change
and volume in an attempt to confirm the strength
of price trends or through divergences, warn
of weak price movements.
Unlike other price-volume indicators, the
price volume trend takes into consideration
the percentage increase or decrease in price,
rather than just simply adding or subtracting
volume based on whether the current price
is higher than the previous day’s price
On an up day, the volume is multiplied by
the percentage price increase between the
current close and the previous time-period’s
close.
This value is then added to the previous day’s
price volume trend value.
On a down day, the volume is multiplied by
the percentage price decrease between the
current close and the previous time-period’s
close.
This value is then added to the previous day’s
price volume trend value.
Chaikin money flow is another volume indicator,
which determines if an instrument is under
accumulation or distribution.
The Chaikin money flow indicator compares
the closing price to the high-low range of
the trading session.
Chaikin money flow measures buying and selling
pressure over a set period of time.
If the stock’s price closes near the high
of the session with increased volume, the
Chaikin money flow increases in value
If the stock’s price closes near the low
of the session with increased volume, the
Chaikin money flow decreases in value.
Other useful indicators are the volume weighed
moving average, volume weighted average price
and volume-weighted MACD, but these indicators
will be discussed separately in future videos.
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Until next time.