If you make decisions based on the volume of traded financial assets within a given timeframe, you will need volume indicators. They help to measure how much of a chosen financial instrument has been sold or bought. What's more, a volume indicator makes it possible to see how many contracts and CFDs changed hands. This is where online charts and patterns become the dominating force to measure and trade volume.
Those who use technical analysis are well aware of the important role volume plays when examining various patterns. Additionally, it can be used along with some major technical indicators to have an in-depth market overview.
In this article, we will highlight some of the most popular and effective volume-based indicators for enhanced trading.
Top 3 volume indicators to consider
Each volume indicator represents a math formula that is visually plotted on a trading chart or pattern. There is a different formula for each particular indicator. For this reason, they should not be considered as a single flexible solution for every strategy. A trader is supposed to choose the one that meets his or her trading tactics. Selecting an indicator will also depend on the market approach.
You are not obliged to use any of the following indicators. They do not guarantee success. On the other hand, they deliver better decision-making and market overview. So, here some of the top ones:
- OBV – the On-balance volume indicator is perfect for beginners. It does not require special skills or manipulations. Not only does it show divergence, but also depicts volume added or subtracted when the market finishes higher or lower.
- Klinger Oscillator – it helps to identify fluctuation in the area below or above the zero lines. What's more, it makes it possible to calculate the sum of buying and selling volume within a given timeframe.
- Chaikin Money Flow – is a type of short-term volume indicator that is able to oscillate. Traders use it to keep an eye on prices rising along with the rising volume and vice versa (prices finishing lower with a lower volume of daily range traded assets).
Talking about indicators, the most convenient way to use them is to install MetaTrader 4 to your computer and test indicators on a free Demo account with demo-balance 5000$ on it. Right after you go through a quick registration process, you will be able to download MT4 inside your Trader's Room.
Before choosing the one to use with your particular trading strategy, let's have a look at some useful tips and decide, which of the volume indicators will suit you best and how they can actually help.
Baseline volume indicators usage guide
The guide is not mainly about how to use volume-based indicators, but more about what you see and take from them and see. As a rule, traders generally spot only strong prices and market moves. They miss weaker moves that may also have great potential in terms of profit. The following steps will not take you to the top. However, they will definitely help you make better and faster decisions.
So, volume-based indicators will help to:
- Confirm the Trend – we are used to the rising prices when the market goes up. However, when the price rises and the volume decreases, this may be the sign of the sooner reversal as well as the lack of interest in a particular asset.
- See Volume and Moves – this one mainly refers to volume and exhaustion market moves. They represent sharp and fast price movement often accompanied by a rapid volume rise. If you witness this kind of situation, the trend is very likely to go to an end.
- Spot Bullish Signs – when the price moves lower but does not hit the previous low, it can be interpreted as a bullish sign, especially when it comes to the price decline in the face of increased volume.
- Overview Volume History – traders get a chance to track market and price moves over a specific period and compare them with the current situation. We recommend using more recent dates, as they are supposed to be more relevant.
Looking at volume will enhance your trading, as you will have a chance to see specific market moves or spot potential reversal. What's more, you will be able to confirm the trend as well as define the level of market strength. Volume-based indicators are good for better decision-making and identifying market strong and weak points. However, they sometimes are not as precise as you expect them, especially when it comes to short-term trading.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.