To help you understand, we’ll elaborate on the best volume technical indicators every trader needs.
What are volume indicators?
Generally, low volumes mean a lack of interest in particular shares and vice versa. Therefore, we can use the best volume based technical indicators to determine when the trend is about to reverse.
So what is a good volume indicator? It is a great visual representation of the interplay between volume and price action. These indicators show the number of shares sold or bought at a certain period. Some of the best volume technical indicators include:
On-Balance Volume (OBV)
The OBV is the most popular volume indicator that functions by adding the volumes of the up days and then subtracting the total of down days. Through this calculation, it can predict the general direction of the market.
By analyzing every day’s move, the OBV can give you the necessary confidence moving forward.
This volume indicator used the principle that more significant volumes mean great convictions. Basically, a volume of 10 million shares is more than 1 million shares traded, irrespective of the market’s direction. So if the stock closes lower than yesterday, then it’s considered a downtrend.
On top of the OBV value, you can focus on the direction of the indicator. For instance, if the price is rising and this indicator is making higher troughs and peaks, then the uptrend is continuing and vice versa. You can also focus on divergence when it’s moving in the opposite direction.
If the stock is rising, but OBV is falling, then the price is about to reverse.
Money Flow Index (MFI)
The MFI is the best option for showing the selling and buying pressure by analyzing the price, volume, and time. Like with the OBV, you can use the MFI to spot divergence. This technical oscillator can help you spot oversold or overbought areas.
The oversold and overbought territories can serve as exceptional entries. Remember, moves in this region are pretty rare, so traders using the MFI are usually confident when using this indicator, especially when entering positions in the overbought/oversold territories.
It resembles the RSI in several ways, with the critical difference being that the MFI includes volume. This is the key reason why the Money flow index is sometimes known as the volume-weighted RSI.
The MFI can be interpreted as the RSI. And that’s because this indicator generates trading signals when the stock shows a bearish or bullish divergence, crossovers, and when in the oversold/bought zones.
Volume Weighted Average Price (VWAP)
The VWAP shows the price a stock has traded throughout the day, taking into consideration the volume and price. Unlike most volume indicators, the VWAP resets when a trading session begins. This makes it quite reliable, especially when dealing with intraday charts.
In fact, traders use it to confirm a trend while visualizing it in action. For instance, when it trends above the range of the VWAP, it shows that it’s time to go short. But you should be on the lookout for a bounce around the primary volume support.
Therefore, some companies use this indicator to move in/out of stocks while making a negligible impact on the market.
The xBrat VWAP Predator is the first technical trading indicator to use VWAP and other volume data to provide signals to BUY and SELL when day trading stocks, forex, futures and even Crypto. Not only that it helps traders manage their trades to maximise profits consistently. The chart below is a 5 minute timeframe of the AAPL Stock on a given day. See the two BUY signals early in the day and then the green ribbon keeps the traders in the trad euntil the close.
Accumulation/Distribution Line (Accum./Dist.)
This indicator measures the cumulative cash flow in and out of stock. As the most accurate volume indicator, it detects negative and positive divergences in volume and price data that signal future price movement.
For instance, when an asset is uptrending, but the amount of cash coming out is more than into the share, then you should stay away from that trade. Simply put, it detects negative and positive divergences in volume and price before warning you of the price movement.
It shows the trend of demand and supply, which drive the price movement.