Volume indicators are playa crucial part of technical analysis but many traders ignore them. Apart from facilitating the confirmation of patterns and trends, the volume demonstrates the total stocks sold and bought in the market at a particular period. Traders can then leverage that data to assess other trader’s perceptions of the market.
A key benefit of volume is that it makes way for stock price movement by predicting potential reverse or continuation. As a result, volume indicators are practical tools that every trader should beware of. Read on for tips on using volume and different types of volume indicators available.
How to Leverage Volume
When assessing volume, traders can leverage various guidelines to establish the weakness or strength of a move. Usually, many traders are attracted to solid moves but ignore weaker ones. Other traders will do everything possible to evade a weak move. Here are some general volume usage tips to help you make more informed trading decisions.
· Trend Confirmation
When the market is soaring, the volume should also be increasing. Buyers need rising numbers and spiraling enthusiasm to keep driving prices higher. A rising price and dropping volume could demonstrate disinterest which can be a signal of an imminent reversal.
While understanding this concept can be difficult, traders need to know that a price rise or drop on a small volume is a weak signal. A price rise or drop on significant volume is a strong indication that a component in the stock has changed fundamentally.
· Bullish Signs
Volume can be crucial in recognizing bullish signals. For instance, suppose volume rises in a price drop before a pullback happens. If the price on the pullback does not drop below the earlier low and volume is reduced on the second drop, that could be a bullish signal.
· Exhaustion Volume and Moves
When the market is falling or rising, exhaustion moves will be visible. Usually, there are sharp changes in price and a sharp rise in volume, signaling the possible completion of a trend. Traders that delay and fear missing out from a move give up at the market top which depletes the number of buyers.
At the market’s lowest traded price, falling prices finally kick out numerous traders, increasing volume and triggering volatility. In this case, the volume will eventually drop after the increase. However, different guidelines can be used to assess the volume’s demeanor in the subsequent months, weeks, and days.
· Price Reversals and Volumes
After a prolonged price move is lower or higher, and the price starts to align with heavy volume and less price movement, it could indicate a possible reversal that may trigger a price direction change.
· Volume History
Traders should envision volume based on recent history. Comparing recent times with volume from 20 years before may be irrelevant. By leveraging recent data sets, you are assured of relevant results.
Often, volume is seen as a liquidity indicator because markets or stocks with the highest volume are pretty liquid. Further, they are considered an excellent short-term indicator for trading. Numerous sellers and buyers are ready to trade at varying prices.
Effective Volume Indicators for Your Technical Analysis
Volume indicators can help traders make an informed trading decision. Here are some of the most effective options for your technical analysis strategy.
· Chaikin Money Flow
Increasing prices should be followed by increasing volume. The Chaikin money flow volume indicator focuses on increasing volume when the price closes at the lower or upper level. It also offers a value for the equivalent strength.
Higher closing prices at the end of the day indicate volume expansion and high values. Low closing prices indicate negative values. Chaikin money flow is an excellent short-term indicator due to its oscillation tendencies. However, many traders leverage it to view divergence.
· OBV (On-Balance Volume)
On balance volume is a functional yet straightforward indicator. Volume reduces if the market closes lower and increases once the market closes higher. This approach offers a running total and demonstrates the accumulating stocks. Further, it can demonstrate divergences like when price increases but volume increases gradually or starts dropping.
· Klinger Oscillator
Oscillating below and above the zero line can drive other trading signals. The Klinger oscillator concludes the selling and buying volumes for a specific period.
Volume is a critical tool that helps traders study trends, and there are numerous methods of using it. Leverage the guidelines in this article to evaluate market weakness and strength and determine what volume is confirming or signaling. Volume indicators facilitate the decision-making process of your technical analysis.