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How to Use Volume to Improve Your Trading
Volume is a measure of how much of a given financial asset has traded in a period of time. For stocks, volume is measured in the number of shares traded and, for futures and options, it is based on how many contracts have changed hands. The numbers, and other indicators that use volume data, are often provided with online charts. Looking at volume patterns over time can help get a sense of the strength or conviction behind advances and declines in specific stocks and entire markets.
Basic Guidelines for Using Volume
When analyzing volume, there are usually guidelines used to determine the strength or weakness of a move. As traders, we are more inclined to join strong moves and take no part in moves that show weakness—or we may even watch for an entry in the opposite direction of a weak move. These guidelines do not hold true in all situations, but they offer general guidance for trading decisions.
- Volume measures the number of shares traded in a stock or contracts traded in futures or options.
- Volume can be an indicator of market strength, as rising markets on increasing volume are typically viewed as strong and healthy.
- When prices fall on increasing volume, the trend is gathering strength to the downside.
- When prices reach new highs (or no lows) on decreasing volume, watch out; a reversal might be taking shape.
- On Balance Volume and Klinger Indicator are examples of charting tools that are based on volume.
A rising market should see rising volume. Buyers require increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, and this is a warning of a potential reversal. This can be hard to wrap your mind around, but the simple fact is that a price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.
Exhaustion Moves and Volume
In a rising or falling market, we can see exhaustion moves. These are generally sharp moves in price combined with a sharp increase in volume, which signals the potential end of a trend. Participants who waited and are afraid of missing more of the move pile in at market tops, exhausting the number of buyers.
At a market bottom, falling prices eventually force out large numbers of traders, resulting in volatility and increased volume. We will see a decrease in volume after the spike in these situations, but how volume continues to play out over the next days, weeks, and months can be analyzed using the other volume guidelines.
Volume can be useful in identifying bullish signs. For example, imagine volume increases on a price decline and then the price moves higher, followed by a move back lower. If the price on the move back lower doesn’t fall below the previous low, and volume is diminished on the second decline, then this is usually interpreted as a bullish sign.
Volume and Price Reversals
After a long price move higher or lower, if the price begins to range with little price movement and heavy volume, this might indicate that a reversal is underway, and prices will change direction.
Volume and Breakouts vs. False Breakouts
On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout indicates a lack of interest and a higher probability for a false breakout.
Volume is often viewed as an indicator of liquidity, as stocks or markets with the most volume are the most liquid and considered the best for short-term trading; there are many buyers and sellers ready to trade at various prices.
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Volume should be looked at relative to recent history. Comparing today to volume 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant they are likely to be.
Volume indicators are mathematical formulas that are visually represented in 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. Indicators are not required, but they can aid in the trading decision process. There are many volume indicators to choose from, and the following provides a sampling of how several of them can be used.
On Balance Volume (OBV): OBV is a simple but effective indicator. Volume is added (starting with an arbitrary number) when the market finishes higher, or volume is subtracted when the market finishes lower. This provides a running total and shows which stocks are being accumulated. It can also show divergences, such as when a price rises, but volume is increasing at a slower rate or even beginning to fall.
Chaikin Money Flow: Rising prices should be accompanied by rising volume, so Chaikin Money Flow focuses on expanding volume when prices finish in the upper or lower portion of their daily range and then provides a value for the corresponding strength. When closing prices are in the upper portion of the day’s range, and volume is expanding, the values will be high; when closing prices are in the lower portion of the range, values will be negative. Chaikin money flow can be used as a short-term indicator because it oscillates, but it is more commonly used for seeing divergence.
Klinger Oscillator: Fluctuation above and below the zero line can be used to aid other trading signals. The Klinger oscillator sums the accumulation (buying) and distribution (selling) volumes for a given time period.
Volume and PA the combination of success Part I: “climax”
Good Day Traders,
In this article I am going to make an introduction to the combination of volume and price action. Many traders ignore the changes in volume while they trading maybe because they don’t know its worth or maybe it’s a little bit difficult to understand it. I believe that a combination of the volume and price action maybe with an indicator as confirmation it’s the most solid way to trade.
You know there are so many volume indicators and obviously when you see bigger bars than the previous there is more volume. On the other hand, when you see smaller bars than the previous means there is less volume. I think that the first important thing which someone should know about volume is “climax”. So, what is “climax”?
When we have a big up movement in price with a big volume this is “a buying climax”. This means that many investors during the current candle are buying heavily. In the opposite condition we have the “selling climax”. A big movement down with high volume. This means that the investors in the current candle are selling heavily.
When is the right time to trade? As I said before in a buy climax the price can reach in very high levels. When the investors realize that the price is in a very high level and it’s overbought they start to sell heavily. This is the right time to trade in a case of up trend which is near the end. When you see the price near a resistance level (resistance, whole numbers, trend lines, EMAs) and a buying climax appears and after that you notice low volume or a selling climax maybe it’s time for the end of the up trend.
On the other hand, when the price is near a strong support level and a selling climax appears and after that low volume or a new buying climax maybe it’s the time for the end of the down trend.
So, the key ,as always ,is to buy in lows and sell in highs and with right volume reading and price action you can achieve this. Be careful, you should always wait to see what will happen “AFTER” the climax not during the climax appears. In the next article I will show you some good examples and I will explain you the volume indicator which I use. Stay tuned!
Volume-price trend (VPT), sometimes known as price-volume trend, combines price and volume in the market to form a hybrid trading indicator of the two variables. The basic idea behind the indicator is to multiply the market’s volume by the percentage change in the price over a given interval (usually daily). If price declines, the indicator’s value goes lower due to the negative value. If price increases, the indicator’s value goes higher.
VPT is conceptually very similar to on-balance volume (OBV). With on-balance volume, the indicator increases or decreases based on whether price simply made a new high or low. It does not include the extent of the move into its calculation. With VPT, the indicator moves based on how big of a shift was made in price.
The general premise behind VPT is that the indicator should move in the same direction as price and largely match the magnitude of the move. It is generally assumed that when price moves are accompanied by low volume, this puts a market at risk for a reversal in trend.
For example, consider the following move in the S&P 500 in January 2020 below. The market’s uptrend accelerated despite no conspicuous shift in volume. This told many technical analysts that the move in the index was tenuous. Accordingly, it set up a scenario where price could decline once more volume entered the market. It eventually did exactly this.
VPT would have only picked up on what a pure volume indicator showed if volume had been declining (given the price move is calculated into VPT). Therefore, the price move largely matched with VPT.
Calculation of Volume-Price Trend
As mentioned above, VPT is measured as volume multiplied by the change in price, and is calculated as a running total from the previous period.
VPT = Previous VPT + Volume x (Today’s Close – Previous Close) / Previous Close
It is traditionally calculated daily, though it can be measured over whatever timeframe with which volume data is available. Note that some charting software platforms do not provide volume data on a timeframe lower than the daily level. Therefore this can also restrict one’s ability to trade using the indicator over multiple time intervals.
Interpretation of Volume-Price Trend
When traders look at VPT and how it relates to price they are fundamentally looking for divergences. When there is a divergence between price and volume it usually tells you something.
If volume stays flat, while price increases, this suggests to a trader that the up move in price was relatively weak and may be prone to reversal. Accordingly, a trader who observes this may be less likely to pursue long trades, expecting the market to increase further.
Let’s take a look at the following example:
Here’s the type of divergence we might look for. Price increases, yet VPT actually declined on net. This would imply the up move is fairly weak and may not last. And this is what indeed happened. There was a subsequent drop in the overall market.
Let’s also look at this one:
This isn’t much, but it’s a slight divergence nonetheless. So we know that price slightly increased while VPT stayed the same.
What does this mean?
It means that volume was the same but price still rose. If volume isn’t accompanying the price this means it may be a weak move that may not hold. Does this mean the bull market is running out of steam?
Well, not exactly, if we look at what price did afterwards.
You cannot trade off one indicator alone.
If we look at the chart below, we can see that peaks and troughs in price roughly accord with the same in VPT. However, if we look close enough, we can still see some divergences that are bearish in nature.
If we draw lines between closing prices and closing VPT values (VPT values match with closing prices, not highs and lows of candles), we can see that price is slanting up while the accordant VPT lines are flat to slightly pointing up as well. This again means that volume-based analysis may imply that the up moves in this market may be relatively weak. This makes bullish trades somewhat riskier than they would be otherwise.
Trading With Volume-Price Trend
No indicator should be used independently to make trade decisions. This would be a form of misuse. They are meant to help better guide trading decisions, or better assist in finding entry points, rather than having one indicator as a standalone system.
If we look at the following chart of Apple stock (AAPL), we see the following divergences in price and VPT.
These are, like the previous examples shown above, bearish divergences. Price is going up but the volume isn’t there to support the up move, as evidenced by VPT declining in the first example. In the second divergence, VPT isn’t going up to the same extent as price.
Would there be short trading opportunities here?
It depends on how you approach it. You can use fundamental analysis and/or go further into technical analysis to better make a decision.
For example, let’s say you used a contrarian/price reversal indicator in addition to VPT, such as Keltner Channels, with an average true range of 2.5.
Based on the bearish divergence signal from the VPT and upper touch of the channel, this provides a potential shorting opportunity to consider where the red arrow is marked.
As its name suggests, volume-price trend blends both volume and price to form a cumulative running indicator that gauges the perceived validity of price movements.
The key in valuing VPT in relation to price lies in divergences. If price moves in one direction or another and isn’t matched by at least a concomitant increase in VPT, then traders may perceive the price move as shallow and ripe for reversal.
Bullish divergences will see price going down with VPT up or at least flat. On the other hand, bearish divergences will see price going up with VPT down or at least flat. Price that largely matches up with VPT may help confirm any current trend in the market.
Table of Contents
Volume-by-Price is an indicator that shows the amount of volume for a particular price range, which is based on closing prices. Volume-by-Price bars are horizontal and shown on the left side of the chart to correspond with these price ranges. Chartists can view these bars as a single color or with two colors to separate up volume and down volume. By combining volume and closing prices, this indicator can be used to identify high-volume price ranges to mark support or resistance. StockCharts shows twelve Volume-by-Price bars by default, but users can increase or decrease this number to suit their preferences.
Volume-by-Price calculations are based on the entire period displayed on the chart. On a five-month daily chart, Volume-by-Price would be based on ALL five months of daily closing data, while on a two-week 30-minute chart, it would be based on two weeks of 30-minute closing data, and on a three-year weekly chart, it would be based on three years of weekly closing data. You get the idea. Volume-by-Price calculations do not extend beyond the historical data shown on the chart.
Note that negative volume for a price zone is the sum of volume for all down days in that zone, while positive volume is the total of volume for all up days in that price zone.
The example above shows a Volume-by-Price calculation taken for the Nasdaq 100 ETF from April 12th until September 15th, 2020. Closing prices ranged from 40.32 to 47.87 during this period (47.87 – 40.32 = 7.55). The one hundred and ten closing prices (one for each trading day) were sorted from low to high and then divided into 12 even price zones (7.55/12 = .6292).
The chart above highlights the first three price zones (40.32 to 40.95, 40.96 to 41.58 and 41.59 to 42.21). Starting from the low (40.32), we can add the zone size (.6292) to create the price zones leading to the high. Only prices that fall within these zones are used for that particular Volume-by-Price calculation.
The Volume-by-Price bars represent the total volume for each price zone. Volume can then be separated into positive and negative volume. Notice that the Volume-by-Price bars on the chart above are red and green to separate positive volume from negative volume.
Volume-by-Price can be used to identify current support and resistance levels as well as estimate future support and resistance levels. Price zones with heavy volume reflect elevated interest levels that can influence future supply or demand (a.k.a. resistance or support). Long Volume-by-Price bars underneath prices should be watched as potential support during a pullback. Similarly, long Volume-by-Price bars above prices should be watched as potential resistance on a bounce.
Price breaks above or below long Volume-by-Price bars can also be used as signals. A break above a long bar shows strength because demand was strong enough to overcome a supply overhang. Similarly, a break below a long bar shows weakness because supply was ample enough to overwhelm demand.
Before looking at some examples, it is important to understand how Volume-by-Price works. Volume-by-Price can be used to identify current support or resistance. Current bars should not be used to validate past support or resistance levels because the indicator is based on all the price-volume data shown on the chart. This means six months of data for a chart that extends from January to June. Bars may appear to identify support in March, but keep in mind that the indicator data extends well beyond March because the chart ends in June.
Chartists should also understand that big gaps can produce bars that equal zero. This makes sense because Volume-by-Price equals zero when there are no closing prices within a specific price zone.
The chart for Netflix (NFLX) shows Volume-by-Price identifying support around 95-100 at the end of June. Notice that this is the longest bar. Also, notice that NFLX is beginning a pullback so we can use Volume-by-Price to estimate support in the near future. The second chart shows NFLX with the yellow area marking Volume-by-Price support from the first chart. Support was expected in the 95-100 area and the stock reversed here in late July. Notice that volume surged in August to validate the reversal off of support.
The chart for TE Connectivity (TEL) shows Volume-by-Price identifying resistance around 26-26.5 in early August. Remember, the April break above this bar is not really a breakout because the current Volume-by-Price calculation extends from January to early August. The second longest bar marks current resistance in the 26-26.5 area. TEL is at its make-or-break point with prices near resistance. The second chart shows Volume-by-Price resistance from the first and the ultimate failure at resistance.
A break below a long Volume-by-Price bar signals increasing supply or selling pressure that can foreshadow lower prices. Long bars below prices show elevated interest areas and potential support. A break below this support zone signals a significant increase in selling pressure and lower prices are then expected.
The SanDisk (SNDK) chart shows a long Volume-by-Price bar marking support in the 39-43 area in mid-August. Also, notice that the stock forged at least three reaction lows around 42 from early July to mid-August. This support (demand) zone is clearly marked. The second chart shows SNDK breaking below the previously identified Volume-by-Price support zone with high volume. Demand crumbled, supply won the day and prices moved sharply lower.
A break above a long Volume-by-Price bar signals an increase in demand that can foreshadow higher prices. Long bars above prices mark supply overhangs that demand has not been able to overcome. A break above this resistance zone signals strengthening demand and higher prices are expected.
Sometimes chartists need to combine price action and Volume-by-Price to identify support zones and resistance zones. The McDonalds (MCD) chart shows a long bar marking overhead supply between 60 and 61. The stock also met resistance between 61 and 62 with reaction highs in late April and mid-June. For support, the second and third longest bars mark potential demand in the 57.5-58.5 area and the stock is near the late May low. Overall, a large Symmetrical Triangle could be forming on the price chart as MCD tries to hold above the late May low. The second chart shows MCD breaking resistance in July and surging to new highs in August.
Volume-by-Price is best suited for identifying present or future support and resistance. The indicator marks potential support when prices are above a long bar and potential resistance when prices are below a long bar. Chartists can enhance their analysis by looking at the positive (green) and negative (red) volume within the Volume-by-Price bars. Long green portions reflect more demand that can further validate support. Long red portions reflect more supply that can further validate resistance. It is important to confirm Volume-by-Price findings with other indicators and analysis techniques. Momentum oscillators and chart patterns are good complements to this volume based indicator.
Using with SharpCharts
Volume-by-Price can be found in SharpCharts in the “overlays” section. Initially the parameter box is empty and the default value of 12 periods is used. Chartists can increase or decrease the default setting depending on the amount of detail desired. Keep in mind that Volume-by-Price is based on closing prices, which means highs and lows are not included. This is why chartists may sometimes see a spike low or high without a Volume-by-Price bar. Volume-by-Price is one color when the “color volume” box is not checked and two-toned when this box is checked. Chartists can also use the advanced indicator settings to set the opacity. The example below shows Apple with 20-bar Volume-by-Price, colored volume, and 0.3 opacity. Click here for a live example.
Using Volume Trading Strategy to Win 77% of Trades
Looking for the best volume trading strategy? Your hunt for the Holy Grail is over. With a win-rate of 77%, this can be one of the best Forex trading strategy that you’ll ever find on the internet… and it’s totally FREE.
With more than 30 years of trading experience combined, our team at Trading Strategy Guides has put together this step-by-step trading guide so you can take advantage of analyzing the strength of a trend based on volume activity.
The Forex market, like any other market, needs volume to move from one price level to another.
The Forex market is the largest and the most liquid market in the world, with 6 trillion dollars worth of transactions performed on a daily basis. If you can master volume analysis, a lot of new trading opportunities can emerge.
When we have a lot of activity and volume in the market, as a consequence, it produces volatility and big moves in the market. That’s really what most traders need in order to make a profit trading the Forex market or any other market be it stocks, bonds or even cryptocurrencies.
While you can still make money even in tight range markets, most trading strategies need that extra volume and volatility to work.
Volume Indicator Forex
In the Forex market, we don’t have a centralized exchange of total volume because we’re trading over the counter. If we look at any trading platform like TradingView, they have a volume attached to their chart. But, since we don’t have a centralized exchange that volume is coming from the feed that TradingView uses. Each retail Forex broker will have their own aggregate trading volume.
We can see that the volume in the Forex market is segmented, which is the reason why we need to use our best volume indicator.
The Volume indicator Forex used to read a volume in the Forex market is the Chaikin Money Flow indicator (CMF).
The Chaikin Money Flow indicator was developed by trading guru Marc Chaikin, who was coached by the most successful institutional investors in the world.
The reason Chaikin Money Flow is the best volume and classical volume indicator is that it measures institutional accumulation-distribution.
Typically on a rally, the Chaikin volume indicator should be above the zero line. Conversely, on sell-offs, the Chaikin volume indicator should be below the zero line.
Volume Trading Strategy
This volume trading strategy uses two very powerful techniques that you won’t see written anywhere else. These are trade secrets that we’ve only been taught to professional traders.
The Chaikin indicator will dramatically improve your timing and teach you how to trade defensively. Having a good defense when trading is absolutely critical to keep the profits that you’ve earned.
Before we go any further, we always recommend taking a piece of paper and a pen and take notes of the rules of this entry method. You can also read a million USD forex strategy
In this article, we’re going to look at the buy side.
The Importance of Buying Volume and Selling Volume
Volume trading requires you to pay careful attention to the forces of supply in demand.
Volume traders will look for instances of increased buying or selling orders. They also pay attention to current price trends and potential price movements.
Generally, increased trading volume will lean heavily towards buy orders. These positive volume trends will prompt traders to open a new position.
On the other hand, if the cash flow and trading volumes decrease– we see a “bearish divergence”, meaning that it will likely be an appropriate time to sell.
You also need to pay attention to the relative volume —regardless of the raw number of transactions occurring in a trading period. Ask yourself how is the prospective asset performing relative to what was expected?
By learning how to use the Chaikin money flow and other relevant indicators, you will easily be able to identify whether the buyer or the seller is currently “in control.”
With practice, volume trading strategies can yield wins for your portfolio 77% of the time!
Step #1: Chaikin Volume Indicator must shoot up in a straight line from below zero (minimum -0.15) to above the zero line (minimum +0.15).
When the Volume goes from negative to positive in a strong fashion way it has the potential to signal strong institutional buying power. That’s our base heavy lifting signal!
Basically, we let the market to reveal its intentions.
When big money steps into the market, they leave a mark as their orders are so big that it’s impossible to hide. When the volume indicator Forex goes straight from below zero to above the zero line and beyond, it shows accumulation by smart money.
We’re a firm believer that you get the maximum bang for your buck when you trade side by side with smart money. Chances are that institutions have more money and more resources at their disposal. Odds can be stacked against you, so if you want to change that, just follow the smart money.
There is one more condition that needs to be satisfied to confirm a trade entry.
Step #2: Wait for the Volume Indicator Forex to slowly pullback below the zero line. The price needs to remain above the previous swing low.
Once we spotted the elephant in the room, aka the institutional players, we start to look for the first sign of market weakness. Here is how to identify the right swing to boost your profit.
We’re going to let the Chaikin Money Flow indicator slowly drop below the zero line. The keyword here is “slowly”. We don’t want to see the volume dropping fast because this will invalidate the accumulation noted previously.
Second, as the volume decreases and drops below the zero, we want to make sure the price remains above the previous swing glow. This will confirm the smart money accumulation.
The Volume strategy satisfies all the required trading conditions, which means that we can move forward and outline what is the trigger condition for our entry strategy.
Step #3: Buy once the Chaikin Forex indicator breaks back above the zero line. Wait for the candle to close before pulling the trigger.
Now that we have observed real institutional money coming into the market, we wait for them to step back in and drive the market back up.
When the Chaikin indicator breaks back above zero, it signals an imminent rally as the smart money is trying to markup the price again.
We would need to wait for the candle close to confirm the Chaikin break above the zero line. Once everything aligns, we’re free to open our long position. Here is an example of a master candle setup.
*Note: The trigger candle needs to have the closing price in the upper 25%.
This brings us to the next important step. We need to establish the Chaikin trading strategy which is finding where to place our protective stop loss.
Step #4: Hide your protective Stop Loss under the previous pullback’s low
Using a stop loss is crucial if you want to have an idea of how much you’re about to lose on your trade. Never underestimate the power of placing a stop loss as it can be lifesaving.
Simply hide your protective stop loss under the previous pullback’s low. Never use a mental stop loss, and always commit an SL right at the moment you open your trades.
Trading with a tight stop loss can give you the opportunity to not just have a better risk to reward ratio, but also to trade a bigger lot size.
Last but not least, we also need to learn how to maximize your profits with the Chaikin trading strategy.
Step #5: Take profit when the Chaikin Volume drops below -0.15
Once the Chaikin volume drops back below -0.15, it indicates that the sellers are stepping in and we want to take profits. We don’t want to risk giving back some of the profits gained so we liquidate our position at the first sign of the smart money stepping in on the other side of the market.
We always can get back into the market later if the smart money buyers show up again.
**Note: The above was an example of a BUY trade using the best volume indicator. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.
Conclusion – Best Volume Indicator
The Volume Trading Strategy will continue to work in the future because it’s based on how the markets move up and down. Any market moves from an accumulation (distribution) or base to a breakout and so forth. This is how the markets have been moving for over 100 years.
Smart money always seeks to mask their trading activities, but their footprints are still visible. We can read those marks by using the proper tools. Here is another strategy on how to apply technical analysis step by step.
Make sure you follow this step-by-step guide to properly read the Forex volume. The Chaikin indicator will add additional value to your trading because you now have a window into the volume activity the same way you have when you trade stocks.
Thank you for reading!
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