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. 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 by 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. After a long price move higher or lower, if the price begins to range with little price movement and heavy volume, then this might indicate that a reversal is underway, and prices will change direction.
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 should be looked at relative to recent history. Comparing volume 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 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.
Volume indicators are mathematical formulas that are 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. 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 is a simple but effective indicator. Volume is added starting with an arbitrary number when the market finishes higher or 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.
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 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. 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. Daily volume is the most common time frame used when discussing stock volume. Average daily trading volume is the daily volume of shares traded, averaged over a number of days; this smooths out days when trading volume is unusually low or high.
Popular volume indicators include three mentioned above—on-balance volume OBV , Chaikin Money Flow , and Klinger oscillator—as well as the volume price trend indicator and Money Flow Index. Volume patterns provide an indication of the strength or conviction behind price advances or declines for a stock or sector or even the entire market.
An advance on increasing volume is generally viewed as a bullish signal, while a decline on heavy volume can be interpreted as a bearish signal. New highs or lows on decreasing volume may signal an impending reversal in the prevailing price trend. In the case of a pullback in a stock or market, the volume should be lower than it is when the price is moving in the direction of the trend, typically higher. Volume is a handy tool to study trends, and as you can see, there are many ways to use it.
Basic guidelines can be used to assess market strength or weakness, as well as to check if volume is confirming a price move or signaling that a reversal might be at hand. Indicators based on volume are sometimes used to help in the decision process. In short, while volume is not a precise tool, entry and exit signals can sometimes be identified by looking at price action , volume, and a volume indicator.
Gallant, A. Ronald, Peter E. Rossi, and George Tauchen. Edwards, Robert D. Bassetti, and John Magee. Technical analysis of stock trends. CRC press, Joseph E. Chaikin Analytics. Technical Analysis Basic Education. Trading Strategies. Technical Analysis. Here are the top 10 forex indicators that every trader should know:. Moving average MA is a crucial forex indicator that indicates the average price value over a particular period that has been chosen.
If the price trades are above the moving average, it means buyers are controlling the price, and If the price trades are below the moving average, it means sellers are controlling the price. Therefore in trading strategy, a trader should focus on buy trades if the price is above the moving average.
The moving average is one of the best forex indicators that every trader should know. When it comes to measuring the price volatility of a particular security, the Bollinger bands indicator is used to determine the entry and exit points for a trade. Bollinger bands come in three parts, the upper, middle, and lower brands.
These bands are often used to determine overbought and oversold conditions. The best part about this indicator is that it helps characterize the price and volatility over time of a financial instrument. The Average True Range indicator is used to measure the market volatility. The key element in this indictor is the range, and the distinction between periodic low and high is called range.
The range can be applied on any trading period, such as intraday or multi-day. In the Average True Range, there is a use of the true range. True range is the biggest of three measures: 1 Current high to low period 2 Previous close to current high period 3 Prior close to current low period The absolute value of the biggest of the three ranges is called the true range. However, the average true range ATR is the moving average of specific true range values.
This is one of those indicators that tell the force that is driving in the forex market. In addition, this indicator helps identify when the market will stop in a particular direction and will go for a correction. EMA is a kind of moving average where the current data gets larger importance.
Fibonacci is another excellent forex indicator that indicates the exact direction of the market, and it is the golden ratio called 1. Several forex traders use this tool to identify areas and reversals where profit can be taken easily. Fibonacci levels are computed once the market has made a big move up or down and looks like it has flattened out at some specific price level. The retracement levels of Fibonacci are plotted to find areas to which markets may retrace before moving back to the trend that the movement in the first price has created.
The RSI is another forex indicator that belongs to the oscillator category. It is known to be the most commonly used forex indicator and showcases an oversold or overbought condition in the market that is temporary. The RSI value of more than 70 shows an overbought market, while a value lower than 30 shows an oversold market.
Thus, several traders use 80 RSI value as the reading for overbought conditions and 20 RSI value for the oversold market. This forex indicator showcases the demand-supply balance levels of a pair of currencies.
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1. On-Balance indicator: ; 2. Volume RSI: ; 3. Volume Price Trend Indicator: ; 4. Money flow index: ; 5. Chaikin Money Flow Indicator. Volume indicators are those that account for the volume. For the Forex market 'volume' means number of ticks (price changes) that appeared in the time. 1. Volumes · 2. On Balance Volume (OBV) · 3. Money Flow Index (MFI) · 4. Accumulation/Distribution.