analysis can help to confirm the existence, or a continuation, of a trend - If trading increases, prices generally move in the same direction - or trend reversal - If there is no relationship between the trading and the price of a security, this signals weakness in the current trend and a possible reversal.
Essentially, trading can legitimize a security's price action, which can then aid an investor in their decision to either buy or sell that security.
So let’s begin by having a closer look at what is and how it can help traders!
What is Volume?
The represents all the recorded trades for a security that occurs in a given time interval. It is a measurement of the participation, enthusiasm, and interest in a given security. Think of as the force that drives the market. substantiates, energizes, and empowers price. When increases, it confirms price direction; when decreases, it contradicts price direction.
In theory, increases in generally precede significant price movements. However, If the price is rising in an uptrend but the is reducing or unchanged, it may show that there’s little interest in the security, and the price may reverse.
A high usually indicates more interest in the security and the presence of institutional traders. However, a rapidly rising price in an uptrend accompanied by a huge may be a sign of exhaustion.
Traders usually look for breaks of to enter positions. When security break critical levels without , you should consider the breakout suspect and prime for a reversal off the highs/lows
spikes are often the result of news-driven events. spike will often lead to sharp reversals since the moves are unsustainable due to the imbalance of
Important note: there’s no centralized exchange where trades are recorded, so the data represents what happens at a particular exchange only
In most charting platforms, the indicator, one of the oldest market indicator, is presented as color-coded bars, green if the security closes up and red if the security closed lower, where the height of the bars show the amount of the recorded trades. Additionally, there are many custom studies, available on trading platforms as it is the case for @TradingView, where the information is presented with added additional insight, such as adding moving average, presenting relative with four colored histogram
Apart from the itself, your ability to assess what is telling you in conjunction with price action can be a key factor in your ability to turn a profit in the market. It makes little sense to analyze the alone. To correctly interpret the data, it shall be seen in the light of what the price is doing. there are a lot of other indicators that are based on the data as well as price action. Analyzing those indicators has always helped traders and investors to better understand what is happening in the market. Here are some of the commonly used indicators:
The indicator, is a indicator that relates flow to changes in a security’s price. It uses a cumulative total of positive and negative trading to predict the direction of price. The OBV is a volume-based momentum oscillator, so it is a leading indicator — it changes direction before the price
Granville, creator of OBV, proposed the theory that changes in precede price movements in a measurable way. He believed that was the main force behind major market moves and thought of OBV’s prediction of price changes as a compressed spring that expands rapidly when released.
It is believed that the OBV shows the interactions between the institutional and retail traders in the market
If the price makes a new high, the OBV should also make a new high. If the OBV makes a lower high when the price makes a higher high, there’s a classical divergence — indicating that only the retail traders are buying. Another type of divergence occurs when the price remains relatively quiet and fails to make a higher high but the OBV soars higher than the previous high — indicating that the institutional traders are accumulating short positions. On the other hand, if the price makes a lower low and the OBV makes a higher low, there is a classical , showing that the institutional traders don’t believe in that move
Money Flow Index
The Index indicator ( ) is a tool used in for measuring buying and selling pressure. This is done through analyzing both price and . When the rises, this indicates an increase in buying pressure. When it falls, this indicates an increase in selling pressure. The Index can generate several signals, most notably: overbought and oversold conditions, divergences, and failure swings
The is essentially the with the added aspect of
The indicator ( CMF ) is a indicator that measures the over a chosen period. The is a measure of the and where the price closed relative to the trading session’s range. It comes from the idea that buying pressure is indicated by a rising and recurrent closes in the upper part of the session’s price range while selling pressure is demonstrated by an increasing and repeated closes in the lower part of the price range.
Both buying and selling pressures are accompanied by an increase in , but the location of the closing prices are in accordance with the direction of price
There are many others, that you may be interested to check further
• Price-Volume Trend (PVT)
• Price Confirmation Indicator (VPCI), Dormeier’s awarded study
• , base for
• Volume-Weighted Price Bars, present if price movements are supported by Volume
Additional example custom studies to the one presented with the idea
analysis is very important to traders and investors. There are numerous indicators out there, but we have discussed some of the commonest ones. Study them and add them to your analysis tools to improve your trading.
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