The volume indicators, as the title above says, are indicators that account for the number of ticks or price changes appeared in the time break. In the FOREX market called ‘Volume’.
This technique aims to evaluate the health of a trend, over a volume activity basis.
It is know that this is one of the most popular indicators used by market technicians as well. That way you can use this method to observe the process of buying and selling activities of a stock at key levels.
What is volume?
The volume is nothing more than the recorded trades for your own security during a specified period or moment. It can be defined as a measure of what is the amount of a financial asset that has been traded in a given period of time.
The volume is represented by two bars.
Each bar has a specific color, green or red.
- Green bar: this bar is printed in green only if the stock closes up for a short period.
- Red bar: the bar is in red when indicating a stock closed lower for a certain time.
Those colors just represent how the stock closed.
The volume is related to other concepts of the Forex world. For example, the volume and exhaustion moves.
Exhaustion moves always exist in a rising and falling market, these are moves in price, which are combined with a sharp increase in volume, that indicates the potential end of a trend. Then, we have volume and price reversals.
When the price gets higher or lower, it usually starts to range with heavy volume, which indicates a reversal.
Volume indicators. How do they work?
The volume indicators are mathematical formulas you find visually represented in charting platforms.
Now, each one of these indicators use a slightly different formula, and then, the trader needs to find the indicator that is better for their individual and particular market approach.
You should take as an advice the fact that you need to use volume indicators only for short time periods, less than an hour, for example.
The truth is that the indicators are not required, but they can definitely help with the trading decision process. There are many volume indicators you can use to make your trading experience easier.
In this sense, we are going to show you a few of them, so you can make your own decisions about this tool which can help you out with your trading strategy.
- Chaikin money flow: this volume indicator uses a formula that focuses on expanding the volume when prices finish whether in the upper or lower portion of their everyday range.Then they’ll provide you an according value for the corresponding strength.
This can be used as a short term indicator, but normally is used for seeing divergence.
- On-Balance volume: this is a truly efficient but simple indicator. It was introduced in 1963 by Joe Granville. He speaks about it on his book Granville´s New Key to Stock Market Profits.
It starts with an arbitrary number, and then the volume is added once the market finishes higher, and the volume is subtracted once the market finishes lower.
With this, you can see the stocks that are being accumulated and able to see the divergences too, for example, when a price rises but the volume is increasing at an actually slower rate or if it is beginning to descend.
- Accumulation/distribution indicator-AD Indicator: this is a volume-based technical analysis indicator designed to reflect growing inflows and outflows of money for a determinate asset that tries to compare close prices with highs.
The volume owning a specific characteristic it has an active involvement of the participants in the Forex market, with the intensity and strength that characterize it.
The volume increases alongside a stable uptrend just when the price rises and it decreases when the price falls.
The volume is always a little bit ahead of the price. There is no way of showing the direct volume of transactions, which is a rule in the FOREX market. The activity of the price changes is correlated with the real volume of transactions.
The volume is really important and totally useful,; there are many ways to use it, and if you are a Forex client, it will come in handy. This is basically going to help you in the decision process.
It is important to know that you need to search for the best volume indicator that adapts to your trading strategy and that way it will be one of your best partners in your Forex journey.