Understanding Buy And Sell Volume Indicators: There are a number of ways in which you can trade in the stock markets. One such way that would help us in identifying trends and spotting trade opportunities, would be volume-based indicators.
In this article, we will understand how volume-based indicators can be used and how they help in the identification of trades. We will also discuss the different types of volume indicators that can be used for profitable trading.
What Is Volume?
Before jumping into the concept of Buy And Sell Volume Indicators, let’s first understand what is Volume. In stock markets, volume or trading volume means the number of shares traded over a particular period.
Trading volume is measured over a specific period of time. For instance, the stock trading volume would refer to the number of shares of security traded between its daily open and close.
Trading volume, and changes in volume over the course of time, are important inputs for technical traders. Volume tells traders about the market’s activity and liquidity.
Higher trade volumes for specified security mean higher liquidity, better order execution, and a more active market for connecting a buyer and seller. Volume tends to be higher near the market’s opening and closing times.
Volume In Technical Analysis
Volume indicator analysis is an important technical parameter that is ignored by most beginners.
It also indicates how many stocks were bought and sold in the market at a given period. This helps us in gauging how other traders perceive the market.
One of the main benefits of volume is that it leads to movement in the share prices, giving us early signals about the price movement. Hence volume indicators are useful measures for a trader.
Importance Of High Volumes
High volume indicates more interest in that stock and the presence of more buyers and sellers in the stock.
When the stock is in an uptrend and there is an increase in volume along with it, that generally indicates that more and more buyers are interested in buying that stock. And the ongoing bullish momentum can be assumed to be genuine.
Similarly, when the stock is in a downtrend there is an increase in volume along with it then the selling interest gets assured and momentum is likely to continue on the downside. `
What are the types of volume based indicators?
There are various types of volume based indicators available for analyzing a stock. Here are the three most commonly used volume based indicators used while trading:
The on-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville first developed the OBV metric in the 1963 book Granville’s New Key to Stock Market Profits.
Granville believed that volume was the key force behind markets and designed OBV to project when major moves in the markets would occur based on volume changes.
In his book, he described the predictions generated by OBV as “a spring being wound tightly.” He believed that when volume increases sharply without a significant change in the stock’s price, the price will eventually jump upward or fall downward.
The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and less sophisticated retail investors.
As mutual funds and pension funds begin to buy into an issue that retail investors are selling, the volume may increase even as the price remains relatively level.
Eventually, volume drives the price upward. At that point, larger investors begin to sell, and smaller investors begin buying. Despite being plotted on a price chart and measured numerically, the actual individual quantitative value of OBV is not relevant.
The indicator itself is cumulative, while the time interval remains fixed by a dedicated starting point, meaning the real number value of OBV arbitrarily depends on the start date.
Instead, traders and analysts look to the nature of OBV movements over time; the slope of the OBV line carries all of the weight of analysis. Analysts look to volume numbers on the OBV to track large, institutional investors.
They treat divergences between volume and price as a synonym of the relationship between “smart money” and the disparate masses, hoping to showcase opportunities for buying against incorrect prevailing trends.
For example, institutional money may drive up the price of an asset, then sell after other investors jump on the bandwagon. When both prices, as well as OBV, are making higher highs and higher lows then the upward trend is likely to continue.
When both prices, as well as OBV, are making lower highs and lower lows then the downtrend is likely to continue.
The Volume RSI (Relative Strength Index) is quite similar to the price-based RSI with the difference that up-volume and down-volume are used in the RSI formula instead changes in price.
If the price RSI shows the relation between up-moves and down-moves within an analyzed period of time by revealing which moves are stronger, the Volume RSI indicator shows the relation between volume traded during these price up-moves and down-moves respectfully by revealing whether up-volume (bullish money flow) or down-volume (bearish money flow) is stronger.
One of the ways of using this volume indicator would be to trade on the signals generated on the crossovers of the indicator and the center line around which it oscillates.
The same as price RSI, Volume RSI oscillates around 50% center-line in the range from 0 to 100%. In technical analysis, this indicator could be used in the same way as well.
The simplest way of using the Volume RSI would be to generate trading signals on the crossovers of the indicator and the 50% center-line around which it oscillates. Here you have to remember the following:
Respectfully, technical analysis would suggest generating buy/sell signals by following rules:
Volume-Weighted Average Price
The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of every new trading session.
It’s a trading benchmark that represents the average price a security has traded at throughout the day, based on both volume and price.
VWAP is important because it provides traders with pricing insight into both the trend and value of a security.
The volume-weighted average price shows the average price an asset has traded for throughout the session when both the price as well as volume are considered.
This indicator shows the actual value the security is trading at, so it can signal if the security was bought and sold at a fair price.
Traders use the VWAP for eliminating the noise in the market to get an idea of what prices buyers and sellers are willing to transact
When the VWAP is rising or the price crosses above the VWAP line, then it shows that the prices are in an uptrend. Whereas if the VWAP is declining or the price crosses below the VWAP line, it shows that prices are in a downtrend.
VWAP is used in different ways by traders. Traders may use VWAP as a trend confirmation tool and build trading rules around it. For instance, they may consider stocks with prices below VWAP as undervalued and those with prices above it, as overvalued.
If prices below VWAP move above it, traders may go long. If prices above VWAP move below it, they may sell their positions or initiate short positions.
Institutional buyers including mutual funds use VWAP to help move into or out of stocks with as small of a market impact as possible. Therefore, when they can, institutions will try to buy below the VWAP, or sell above it.
This way their actions push the price back toward the average, instead of away from it.
These are a few of the many volume indicators that can help you in identifying trends. These volume indicators must be used in conjunction with other technical indicators and chart patterns for higher accuracy.
In this article, we discussed what volumes are, the importance of high volumes, and some important volume indicators. That’s all for the article on Buy And Sell Volume Indicators, We hope you enjoyed reading it. Happy Investing!
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