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The Complete Guide to Volume Indicators

Volume indicators are technical tools to evaluate a security’s bull and bear power. Most look specifically at buying vs. selling pressure to determine which side is in control of price action. Others attempt to identify emotions that are moving the security at a particular time. For example, exceptionally high volume compared to a moving average of volume can reveal euphoria or fear while much lower than average volume can reflect apathy or disinterest.

These indicators measure shares in the equity markets, contracts in the futures markets, and tick movements in the forex markets. All versions attempt to accomplish the same types of technical analysis. When a market rises on increased volume, it is considered to be under accumulation. Conversely, when a market falls on increased volume, it is considered to be under distribution.    In addition, a market rising on decreased volume generates a bearish divergence while a market falling on decreased volume generates a bullish divergence.

Forex market volume evaluates the degree of price movement within a certain period, rather than looking at individual buy and sell transactions. Forex traders often supplement their accumulation-distribution analysis by looking at open interest in the currency futures markets. Whether equity, contract, or pair, volume is used in conjunction with price action to confirm trend strength, reveal trend weakness, and confirm breakouts and breakdowns.

Accumulation-Distribution (A/D)

Accumulation-Distribution (A/D) is a cumulative volume indicator, meaning that each data point is added to the prior data point before it’s plotted on an indicator panel. As the name states, the indicator attempts to determine if a security is being accumulated (bought over time) or distributed (sold over time). The calculation measures the closing price in relation to the price bar’s range and multiplies the result by volume for that bar.

A/D indicator direction generates convergence and divergence relationships with price that assist in trade decision-making and risk management when used in conjunction with pattern analysis and other technical indicators. Rising price when A/D is falling generates a bearish divergence while falling price when A/D is falling generates a bullish divergence. The indicator also carves orderly patterns over time that look similar to price action, with channels, trendlines, and triangles assisting prediction.

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On Balance Volume (OBV)

On Balance Volume (OBV) was created by Joseph Granville in 1963 and is now the most popular accumulation-distribution indicator. OBV generates a bullish divergence when price is falling and OBV is rising and a bearish divergence when price is rising and OBV is falling. The value of OBV at a particular time isn’t important but the relationship between current and prior OBV levels determines whether accumulation or distribution is keeping up with price action.

OBV plots a running total of a security’s buy and sell volume, seeking to determine if it is under accumulation (bought over time) or distribution (sold over time). The calculation has three primary components. First, if the current price bar is higher than the previous price bar, current OBV = previous bar’s OBV + current volume. Second, if the current price bar is lower than the previous price bar, current OBV = previous bar’s OBV – current volume. Third, if the current price bar = the previous price bar, current OBV = previous OBV.

Chaikin Money Flow (CMF)

Chaikin Money Flow (CMF) was created by Marc Chaikin in the early 1980s. The indicator measures accumulation and distribution of a security over time. This is an oscillator, with values ranging from +100 to -100 and a zero line that signifies neither accumulation nor distribution. As with other oscillators, CMF generates buy, sell, and confirmation signals through bullish and bearish convergences and divergences as well as crossovers through the zero line.

Chaikin applied a 21-period (one month) setting to the indicator but that element is now customizable in charting programs and has different implications, depending on the chosen period. According to the creator, money flow persistence over 6 to 9 months evaluates accumulation or distribution by major funds and institutions. Most traders don’t need that information but CMF also reveals short-term money flow convergence-divergence when viewed with shorter time frames and settings.

Volume Oscillator (VO)

Volume Oscillator (VO) identifies accumulation and distribution by examining the relationship between two volume moving averages. A fast cycle moving average of 14 days or weeks is often used in conjunction with a slow cycle moving average of 28 days or weeks but settings are customizable. The calculation simply subtracts the slow MA from the fast MA and plots the result as a line or histogram. As with other oscillators, VO fluctuates across a zero line but has no fixed upper or lower values.

VO is non-directional and expected to turn higher in both uptrends and downtrends. It generates a bearish divergence when price is rising and VO is falling and a bullish divergence when price is falling and VO is falling. The indicator also has the power to identify overbought and oversold markets and to confirm breakouts and breakdowns. In addition, crossovers through the zero line may reveal important turning points or be used to confirm other technical indicators.

Balance of Power (BOP)

Balance of Power (BOP) measures the strength of buying and selling pressure. This oscillator is plotted in a panel with a central zero line and extremes at +1 and -1. Buyers are in control when the indicator is located above the zero line while sellers are in control when the indicator is located below the zero line. Readings near the zero line can indicate a reversal in trend or a rangebound market. Values near +1 signal an overbought market while values near -1 signal an oversold market.

BOP divides the distance between the open and close of the price bar by the distance between the high and low of the price bar. The initial result looks choppy and confusing so the calculation is then smoothed by a 14-period or other moving average. The distance above or below the zero line indicates the extremity of the positive or negative price change. It emits buy and sell signals through bullish and bearish divergences with price, as well as crossovers through the zero line.

Additional Volume Indicators

Klinger Volume Oscillator – looks at long and short-term money flow to confirm uptrends and downtrends.

Negative Volume Index – evaluates how rising and falling volume impact price movement over time.

On Balance Volume – calculates accumulation or distribution in a security over time. It generates a bullish divergence when price is falling and OBV is rising and a bearish divergence when price is rising and OBV is falling.

Positive Volume Index – evaluates how rising and falling volume impact price movement over time.

Projected Aggregate Volume – calculates the daily volume up to an intraday setting and projects total volume for the remainder of the session.

Projected Volume at Time – looks back at past sessions to project future volume over specified time periods.

Trade Volume Index – tracks correlation between price movement and volume levels to evaluate accumulation and distribution.

Twiggs Money Flow – applies a variation of Chaikin Money Flow to measure accumulation and distribution of a security over time.

Volume Chart – plots a volume histogram below each price bar.

Volume Oscillator – looks at accumulation and distribution by examining the relationship between two volume moving averages.

Volume Profile – displays the quantity of trading activity of a security at different price levels.

Volume Rate of Change – plots the percentage change of volume over a specified time period to determine if participation is rising or falling.

Volume Underlay – displays volume histograms in the same pane as price, rather than in a separate indicator pane.

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