The main participants in this market are the larger international banks. Starting from an arbitrary number, volume is added when the market finishes higher, or volume is subtracted when the market finishes lower.
Basic Guidelines for Using Volume
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 very 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 stays higher than the previous low and volume is diminished on the second decline, then this is usually interpreted as a bullish sign. After a long price move higher or lower, if the price begins to range with little price movement and heavy volume, this often indicates a reversal.
Know the Difference for additional information. 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 lack of interest and a higher probability for a false breakout.
The Anatomy of Trading Breakouts. Volume should be looked at relative to recent history. Comparing today to volume 50 years ago provides 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 therefore, 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. OBV is a simple but effective indicator. Starting from an arbitrary number, volume is added 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. The Way to Smart Money. Rising prices should be accompanied by rising volume, so this formula 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 closes are in the upper portion of the range and volume is expanding, the values will be high; when closes 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. Figure 6 shows how volume was not confirming the continual lower lows price in Apple stock. Chaikin money flow showed a divergence that resulted in a move back higher in the stock. Fluctuation above and below the zero line can be used to aid other trading signals. The Klinger volume oscillator sums the accumulation buying and distribution selling volumes for a given time period.
In the following figure we see a quite negative number — this is in the midst of an overall uptrend — followed by a rise above the trigger or zero line. The volume indicator stayed positive throughout the price trend. A drop below the trigger level in January signaled the short-term reversal. The price stabilized, however, and that is why indicators should generally not be used in isolation.
From signalling the trend to setting the price, volume is the best friend an stock market investor can strive to have in the market place. Every day a large number of trades are executed in the market.
On a particular entity when a large number of trades happen or essentially that which sees a high volume trade, the price determination is perceived as more accurate. In contrast when only few trades are executed on scrip, the price determination happens via a much lower base of individuals, hence consensus for the given price is seen as relatively low.
Thus, Volume in one word measures the market worthiness of a trade. Thus, a sudden spike in volumes within a short time can signal or prepare a trader for an out of the ordinary move or sudden knee jerk reaction based on some news or related development.
Now you must be thinking a volume is volume, how can equity or forex trade make any difference to volume or its interpretation? In the case of equity trade, ever share trade accounts for a separate entity in the total volume trade, however forex trading happens a little differently. It is impossible to keep track of the contracts traded through a given day world over. The easiest option in this case is, volume is derived from the number of ticks or the change in prices through the course of the session on a particular day.
Certain specific numbers of contracts need to be signed for a move in price so, therefore, every tick in the price of a currency pair represents this amount or volume. Thus, we can deduce that volume plays a key role:.
The volume can be interpreted in various ways to facilitate accurate interpretation of the market trend and technical analysis of the trends that are underway or that need to be predicted:.
This volume based technical indicator is used to determine the flow of money into an asset class. This is essentially calculated by comparing the closing price with the intra-day highs and lows and deriving a weighted average with respect to the trading volume.
This is a tool that is used to confirm a trend or identify the turning point of a specific trend in the forex market. This is again an indicator based on forex trading volumes. This technical indicator gives us an idea of the intensity of money flow in specific assets by comparing the extent of rise or fall in prices in relation to the trading volumes. This is again a volume based technical analysis tool. It basically gives you an idea of the total deals struck in relation to price movement of a specific asset under consideration.
It is a handy tool for trend confirmation and point out reversal points. According to what they say, it is expected to track volumes real-time and tests on the same are underway currently. To start with, this will be tracking the top 14 currency pairs.
This indicator is path breaking in the sense it will be able to provide data on the volume as well as the exact number of transactions on a currency pair. Thus, far we only have indicators that give out the tick volumes for forex trading. However, this real time volume can provide that edge to your trading practices and confirm price movement a lot more precisely.
This data will also be available to the public via the internet. Broker can only see the volume of the transactions done through its own platform. But there is one problem here. A retail broker handles the transactions for retail traders.
Even liquidity providers cannot provide an accurate estimation about the global forex market transactions. The conclusion is that brokers can create some innovative forex volume indicators to attract more clients and customers.
Now that you know what volume is and what volume indicators do, let me tell you something that makes your life much much easier. You want the volume indicators or any other indicators to trade forex and make money, right? The question is do you really have to use forex volume indicators to be profitable and make money through forex trading? You already have a great indicator that shows the best time to enter the market.
It is the candlesticks. You can do it for free and without spending and losing any money: I want to ask you: You said if you enter a trade you take two positions with the same stoploss order. You also said never to move your stoploss. How do you change then from riskier to safer?
Thanks again for candlestick trading. Here is some more explanations about this: It is a good signal for those who have a short position to collect their profit, or move the stop loss much lower.
However, it is risky to go long because market is too bearish and a support line is broken on the monthly chart. Just a novice view my boss. USDCHF formed at a solid level and it shows that the bears are willing to push price lower CADJPY, bears have a sound intention, but bulls are seemingly too strong at this moment, the upward movement prior to the set up was clearly uninterrupted unlike the USDCHF that had certain input from the bears at a point.
Also the current candlestick has a reasonable lower shadow. If it closes like this, I would be a bit hesitant on this setup. What score would you give it? The premature weekly candle seems to have reacted to it. Chris — when determining the negative impact of the lower shadow of a strong confirmation candle — what length must it be so that it is not too long and hence cancels a too strong setup. As you see the current daily candlestick is going up strongly which is what the previous candlestick lower shadow signalled.
Hi Chris Thank you for your attention to replies. You are an exceptionally dedicated man. I sometimes feel that my questions just steal your time unnecessarily. If they do I am sorry for that and apologise for my slow comprehension.
Again todays candle confirms this —. Also, generally speaking, I am seeing that presence of a strong leading bull or bear run has a major influence on the gauged strength meter. Its forming short trade setup on top of very strong up trend.
I will wait till next day because the price might try to go up again, so I will have better price and tighter stop loss. First because you said that there is butterfly pattern, second my stop loss was tighter just 25 pips.
Today price is already in downward and I have moved my stop loss at break even. So its risk free trade for me now. Hi Chris, thanks for the wonderful articles and daily updates.