Introduction to Volume Analysis
Volume analysis is a crucial aspect of trading that involves examining the trading volume of a security to gain insights into market trends and sentiment. By analyzing trading volume, traders can identify the strength of a trend, potential reversals, and areas of support and resistance. Volume indicators, such as the On-Balance Volume (OBV) and Money Flow Index (MFI), are essential tools for traders to make informed decisions. The volume weighted average price (VWAP) is another important concept in volume analysis, representing the average price of a security weighted by its trading volume. These indicators help traders understand the underlying market dynamics and make more accurate predictions about future price movements.
What is a volume indicator?
There are two main metrics used by price charting tools to give users insights into the market and its dynamics. The first is the price itself. While it does not give you any useful information as an isolated number, the context provides much-needed clarity if you know what to look for. Price changing over time is a source of valuable data.
The second metric is the trading volume, the total volume of assets traded in any given period. This metric is not as telling as a price change, but it still provides important insights allowing traders to make better predictions.
Volume is used by many traders to add context to their decision-making and ensure that they are seeing the right picture when observing the behavior of trader groups. When a price moves dramatically, it may mean that there is a new trend forming. However, a small volume will warn a cautious trader to not take bait set up by people who intentionally pump asset prices to offload when it reaches a certain peak. Volume indicators also help in identifying the trend direction, providing crucial information about the trend's momentum.
The combination of multiple metrics provides a valuable and coherent representation of what is happening in the market. Price dynamic alone can be a solid base for analysis. Many traders do not use anything but Moving Averages to conduct their analysis and find optimal strategies. However, adding volume indicators to the mix is never a bad idea.
TradingView has a myriad of interesting choices in its catalog. Some of them are standard instruments that you can find everywhere while others are designed by power users of the platform. Unique volume indicators in technical analysis that break down trading volumes and their dynamics help traders come up with efficient strategies.
How do you get the best volume indicator in TradingView?
The button for all indicators is situated in the top menu of the TradingView terminal. You will need to do just a couple of steps to deploy a volume indicator on your price chart:
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Click the “Indicators” button in the top menu.
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Switch to “Technicals” in the left panel of a new window.
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Type in “Volume” in the search bar.
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Select an indicator that you like. It will be deployed to the chart immediately.
Note that some indicators may be hard to find when you don’t know their exact name. For example, typing in just the word “volume” won’t show one of the most popular indicators OBV which stands for On Balance Volume.
You need to learn more about the best volume indicators in TradingView to understand which instruments will be efficient and useful when used in tandem with price action indicators.
Understanding Market Trends
Market trends are the direction in which a security’s price is moving, and understanding these trends is vital for traders to make profitable decisions. By analyzing volume indicators, such as the Chaikin Money Flow (CMF) and Accumulation Distribution (A/D), traders can identify the strength of a trend and potential reversals. The CMF measures the flow of money into or out of a security, providing insights into buying and selling pressure. Meanwhile, the A/D line measures the cumulative flow of money, helping traders identify divergences between price and volume. These indicators are invaluable for spotting trends, reversals, and key areas of support and resistance, enabling traders to make more informed trading decisions.
Which is the best indicator in TradingView?
Since the performance of a tool depends wholly on who uses it, determining the best volume indicator for TradingView is not possible. Past performance of these indicators does not guarantee future results. Some people claim that OBV is the most important tool to have while others believe that Money Flow Index is way more insightful.
These talking points are irrelevant to the long-term outcome of any given retail trader. Many indulge in other forms of investments and choose things like copy trading to generate profits consistently. While following other retail traders and repeating their steps is not a bad idea in general, there is a certain level of prestige in developing your trading system that relies on your knowledge of the market.
Let’s look at the five best volume indicators widely used by the crypto community and traders in general, to understand which instruments will yield the best results.
On-Balance Volume is great for in-depth analysis
OBV displays the difference between volumes on positive trading periods and negative trading periods. When a trading period ends with a net gain, the indicator subtracts the volume of a period with a net loss. This approach allows the indicator to predict the overall direction of an asset based on the dynamic of trading periods.
The size of the difference is called conviction. The idea is quite simple: price changes that are accompanied by large volumes usually indicate a higher level of conviction among traders that the wind is changing and that the price will start going in a different direction.
The nominal value of the indicator does not represent any meaningful information, but the amplitude of its peaks and dips tells a very interesting story. When the amplitude intensifies and peaks become higher, it means that the price is accumulating momentum for an upward strength. The opposite is true when a bear market is shaping up.
When prices change dramatically, but volumes stay low, it may indicate that there is a potential for trend reversal. OBV is a great tool that any technical analyst must have in their toolkit if they want to look for trend-defining moments.
Money Flow Index
MFI has been around for quite a while and earned fame among retail traders who want to focus on oversold or overbought assets. The MFI uses the typical price, which is the average of the high, low, and close prices, in its calculations. MFI helps them identify moments for trend reversals and generates signals based on its interpretation of the trading volume data.
MFI is an oscillator that shows users when an asset is being moved too much in a certain direction. When something is being sold consistently for a long while, the market becomes oversaturated with low-price offers meaning that a bull run should be somewhere on the horizon simply because retail traders will start jumping on orders and buying everything cheaply boosting trading volumes and prices.
On the other hand, when prices go up for a long time, the market may be tired and the number of traders willing to pay will dwindle driving prices down.
Many experts compare MFI to RSI (Relative Strength Index) which is a fair comparison if you look at the visuals. However, MFI uses trading volume while RSI only takes into consideration the price action.
Accumulation/Distribution Line
This indicator is often used to analyze stocks. Money flow often indicates the strength of any given stock and its value to potential investors. When the A/D line moves in the opposite direction of the stock price, it can indicate potential trend reversals. This is one of the best free volume profile indicators on TradingView if you are interested in analyzing stocks and tokens issued by crypto companies that focus on providing services.
Decentralized Finance may look like something ground-breaking to newcomers, but it is still a company that issues digital assets representing the value of the product. You may not be a partial owner of a blockchain project issuing tokens, but you are expecting their tokens to go up in price because the market believes that the product is worthwhile.
Accumulation/Distribution is an instrument measuring the cumulative flow of value. The divergence between prices and the trading volume is interpreted as the divergence between dynamically changing data of price action and volume. When a price starts going up with volume staying low, the indicator starts predicting a reversal.
Volume-Weighted Average Price
You can look for it in the search bar by typing in “VWAP”. It is a commonly used analytical tool that takes the average asset price across a set number of periods and overlaps it with the current price action and trading volume. VWAP resets at the beginning of each trading session and is used by traders to analyze price dynamics within that session. VWAP is not an oscillator, but an overlay that many retail traders use when they start their session.
It is one of the best volume indicators for day trading since it specializes in analyzing price dynamics within trading sessions and can be used to make predictions right here and right now. VWAP is used as an assisting instrument when a trader needs to identify and visualize the current mood in the market by gauging the trend.
When the price starts going above the VWAP line, it may be a strong indication that the market is ready for a reversal. However, many large investors often utilize this tool to ensure that the market is less volatile. They will take relatively small short positions when the price goes above the line and vice versa. This move makes sure that the price remains steady and moves closer to a weekly or monthly average.
Klinger Oscillator
This indicator was designed by economist Stephen Klinger back in 1977 to analyze the strength of a current trend in the market without compromising the visual clarity and the minutia of immediate changes in metrics. The Klinger Oscillator helps identify a strong trend by analyzing the strength and momentum of the current market trend. Retail traders usually employ this instrument to forecast when the market will reverse its course.
The indicator is made of two colored lines that form an oscillator. These are moving averages using price action and trading volume as their main sources of data. The divergence between these two lines means that the current trend is currently strengthening. When these two lines cross each other in any direction, it means that the trend reversal is likely to happen or is taking place right now.
Klinger is a suitable option for day traders as it helps indicate potential price retracements when there is a sudden move in a particular direction caused by speculation or an unexpected market event. Klinger allows you to see when the correction starts taking place.
Volume Relative Strength Index
We already covered MFI, another volume indicator that looks like RSI. This one is different from Money Flow Index because it directly uses the volume dynamics in its calculations instead of price action meaning that it represents the nominal change in the trading volume averaged across multiple periods. The Volume RSI can indicate a weak trend when the volume dynamics show decreasing momentum.
This approach gives you a clearer picture of the market situation and provides solid insight into the world of trading. The oscillator has percentage-based values and ranges from 0 to 100 with the center line indicating the 50% threshold that usually represents that there is no movement in the market at all.
Whenever an indicator starts crossing the center line, it means that a certain trend starts taking hold of the market in general. For example, RSI hovering above 50 for a long time means that the market is overbuying and the short-term reversal or, at least, a price correction should be taking place shortly.
Thus, there are two main rules:
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When the value goes above the center, it is a good moment to prepare to enter a short position.
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When the value goes below the center, a retail trader should look for entries for a long position.
Volume Price Trend Indicator
You can look for this indicator in the TradingView terminal by typing in “VPT” in the search bar. This is not a very popular tool, but it can still generate valuable insights. The indicator takes the sum of trading volumes across multiple periods and subtracts the change in the price action and immediate volume in percentile points.
The calculation looks similar to that of On-Balance Volume, but it still provides a slightly different visual representation of what is happening in the market. Using VPT is quite easy. You just need to follow several simple rules:
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Price increase on the backdrop of a lowering volume trend is an indication of a soon reversal which is telling during an overall bearish trend.
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When the price starts going down but the volume gains momentum, you may start looking for other signs of a soon-to-start bearish movement.
While VPT can be used as a swing indicator, many retail traders prefer incorporating it in their trend-confirming strategies to look for long-term market positions.
Balance Volume OBV
The On-Balance Volume (OBV) is a popular volume indicator that measures the buying and selling pressure of a security. It is calculated by adding the trading volume on up days and subtracting the trading volume on down days. The OBV indicator can be used to identify trends, reversals, and areas of support and resistance. When the OBV is rising, it indicates buying pressure, while a falling OBV indicates selling pressure. Traders can use the OBV to confirm a trend or identify potential reversals. By analyzing the OBV alongside price movements, traders can gain a deeper understanding of market sentiment and make more accurate predictions about future price changes.
Day Trading Strategies with Volume Indicators
Day trading strategies with volume indicators involve using these tools to identify trends, reversals, and areas of support and resistance. Traders can use volume indicators, such as the OBV and MFI, to confirm a trend or identify potential reversals. They can also use volume indicators to pinpoint areas of support and resistance, which are crucial for setting stop-losses and take-profits. Some common day trading strategies with volume indicators include trend following, mean reversion, and breakout trading. By incorporating volume analysis into their trading strategies, day traders can enhance their decision-making process and improve their chances of trading success.
Market Strength and Volume
Market strength and volume are closely related, as high volume can indicate strong market activity and a potential trend. When a security is trading on high volume, it means that there is a lot of interest in the security, and the price is likely to move in the direction of the trend. Traders can use volume to identify market strength and potential trends. They can also use volume indicators, such as the CMF and A/D, to confirm a trend or identify potential reversals. High trading volume often signals strong market sentiment, providing traders with valuable insights into the current market conditions and helping them make more informed trading decisions.
In conclusion
The TradingView’s best volume indicator is one that you like the most and can read easily. Beginners should stick to simple options like OBV, VPT, and VRSI. These indicators also provide you an opportunity to train in TradingView automated trading using bots provided by vendors like WunderTrading. Simple indicators generate consistent alerts and can help bots work faster.
Incorporating various types of instruments in your analytical and trading game should be a strong priority for any retail trader interested in achieving consistent profitability. The information provided in this article is for educational purposes only and does not constitute formal investment advice. Be aware of the risks involved in trading, as past performance is not indicative of future results.