9 Types of Volume Indicator a trader should know
Volume indicator analysis is an important technical parameter which is ignored by the traders specially the novice traders.Volume plays an important role in technical analysis that helps in confirming trends and patterns.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 are perceiving the market.One of the main benefits of volume is that it leads to price movement of the stock i.e. giving us early signals when the price movement is going to continue or reverse. Hence volume indicators are useful measures for a trader.Before discussing the 9 Types of Volume Indicators let us know what is the significance of high and low volume in the stock market:
Importance of High Volume:
High volume indicates more interest in the stock and the presence of the buyers and sellers in that stock.When the stock is in an uptrend and there is an increase in volume along with the ongoing uptrend then the stocks will continue to go up.It indicates that more and more buyers are interested in buying that stock.Similarly, when the stock is in the downtrend and there is an increase in volume along with the ongoing downtrend then the stocks will continue to go down.As it indicates that more and more sellers are interested in selling that stock.From the daily chart of Reliance Ltd. We can see how increase in volume are leading the prices of the stock:
Importance of Low Volume:
Low volume indicates lack of interest in that particular stock.When the stock is moving up and volume is falling then it indicates the interest of the buyers has reduced in the stock and the uptrend is going to reverse.Similarly, when the stock is moving down and volume is falling then it indicates the interest of the sellers have reduced in the stock and the downtrend is going to reverse.Price Volume What is ExpectedUp Up BullishUp Down Caution- weak hands buyingDown Up BearishDown Down Caution- weak hands sellingBelow is a table which summarizes the above:Having understood the importance of high and low volume, now let us discuss 9 Types of Volume Indicators that will help the traders to analyse volume in trading:
1. On-Balance indicator:
On Balance Volume (OBV) is the volume indicator that calculates the buying and selling pressure as a cumulative indicator which sums up volume on up days and subtracts volume on down days.When the stock closes higher than the previous close, then all of the day’s volume is considered up-volume.Similarly when the stock closes lower than the previous close, then all of the day’s volume is considered down-volume.
Rather than the value, one should focus on its direction.
When both price as well as OBV are making higher peaks and higher troughs, then the upward trend is likely to continue as shown below:When both price as well as OBV are making lower peaks and lower troughs, then the downward trend is likely to continue as shown below:When price continues to make higher peaks but OBV makes lower peaks, then the upward trend is likely to fail, known as negative divergence.When price continues to make lower troughs and OBV makes higher troughs, then the downward trend is to fail, known as positive divergence.This indicator is calculated by adding the day’s volume to a cumulative total when the security’s price closes up, and subtracting the day’s volume when the security’s price closes down.If today’s close is greater than yesterday’s close then: OBV = Yesterday’s OBV + Today’s VolumeIf today’s close is less than yesterday’s close then: OBV = Yesterday’s OBV – Today’s VolumeIf today’s close is equal to yesterday’s close then: OBV = Yesterday’s OBV
2. Volume RSI:
The Volume RSI (Relative Strength Index) is a volume indicator which is similar to the Relative Strength Index except that up-volume and down-volume are used in the formula of RSI instead of changes in price.Volume RSI oscillates around 50% center-line in the range from 0 to 100%.One of the ways of using this volume indicator would be to trade on the signals generated on the crossovers of the indicator and 50% center-line around which it oscillates.
3. Volume Price Trend Indicator:
The volume price trend (VPT) indicator is a volume indicator that helps in determining a stock’s price direction and also the strength of price change.The indicator consists of a cumulative volume line that adds or subtracts a multiple of the percentage change in a share price’s trend and current volume, that is based on the security’s upward or downward movements.This indicator is similar to the on-balance volume (OBV) indicator i.e. it measures cumulative volume and also provides traders with information about a security’s money flow.
The interpretations of the VPT can be summed up as follows:
An increase in price and volume confirms the price trend upward.A decrease in price and volume confirms the price trend downward.An increase in price accompanied by a decreasing or flat volume trend is a negative divergence suggesting that the downward price movement is weak and may reverse.A decrease in price accompanied by an increasing or flat volume trend is a positive divergence suggesting that the upward price movement is weak and may reverse.Below is daily chart of Bharat Heavy Electronics Ltd. which shows the VPT indicator:
4. Money flow index:5. Chaikin Money Flow Indicator:6. Accumulation/distribution:7. Ease of movement:8. Negative volume index:9. Volume-weighted average price:
Volume indicator analysis is an important technical parameter which is ignored by the traders specially the novice traders.Volume plays an important role in technical analysis that helps in confirming trends and patterns.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 are perceiving the market.One of the main benefits of volume is that it leads to price movement of the stock i.e. giving us early signals when the price movement is going to continue or reverse. Hence volume indicators are useful measures for a trader.Before discussing the 9 Types of Volume Indicators let us know what is the significance of high and low volume in the stock market:
Importance of High Volume:
High volume indicates more interest in the stock and the presence of the buyers and sellers in that stock.When the stock is in an uptrend and there is an increase in volume along with the ongoing uptrend then the stocks will continue to go up.It indicates that more and more buyers are interested in buying that stock.Similarly, when the stock is in the downtrend and there is an increase in volume along with the ongoing downtrend then the stocks will continue to go down.As it indicates that more and more sellers are interested in selling that stock.From the daily chart of Reliance Ltd. We can see how increase in volume are leading the prices of the stock:
Importance of Low Volume:
Low volume indicates lack of interest in that particular stock.When the stock is moving up and volume is falling then it indicates the interest of the buyers has reduced in the stock and the uptrend is going to reverse.Similarly, when the stock is moving down and volume is falling then it indicates the interest of the sellers have reduced in the stock and the downtrend is going to reverse.Price Volume What is ExpectedUp Up BullishUp Down Caution- weak hands buyingDown Up BearishDown Down Caution- weak hands sellingBelow is a table which summarizes the above:Having understood the importance of high and low volume, now let us discuss 9 Types of Volume Indicators that will help the traders to analyse volume in trading:
1. On-Balance indicator:
On Balance Volume (OBV) is the volume indicator that calculates the buying and selling pressure as a cumulative indicator which sums up volume on up days and subtracts volume on down days.When the stock closes higher than the previous close, then all of the day’s volume is considered up-volume.Similarly when the stock closes lower than the previous close, then all of the day’s volume is considered down-volume.
Rather than the value, one should focus on its direction.
When both price as well as OBV are making higher peaks and higher troughs, then the upward trend is likely to continue as shown below:When both price as well as OBV are making lower peaks and lower troughs, then the downward trend is likely to continue as shown below:When price continues to make higher peaks but OBV makes lower peaks, then the upward trend is likely to fail, known as negative divergence.When price continues to make lower troughs and OBV makes higher troughs, then the downward trend is to fail, known as positive divergence.This indicator is calculated by adding the day’s volume to a cumulative total when the security’s price closes up, and subtracting the day’s volume when the security’s price closes down.If today’s close is greater than yesterday’s close then: OBV = Yesterday’s OBV + Today’s VolumeIf today’s close is less than yesterday’s close then: OBV = Yesterday’s OBV – Today’s VolumeIf today’s close is equal to yesterday’s close then: OBV = Yesterday’s OBV
2. Volume RSI:
The Volume RSI (Relative Strength Index) is a volume indicator which is similar to the Relative Strength Index except that up-volume and down-volume are used in the formula of RSI instead of changes in price.Volume RSI oscillates around 50% center-line in the range from 0 to 100%.One of the ways of using this volume indicator would be to trade on the signals generated on the crossovers of the indicator and 50% center-line around which it oscillates.
3. Volume Price Trend Indicator:
The volume price trend (VPT) indicator is a volume indicator that helps in determining a stock’s price direction and also the strength of price change.The indicator consists of a cumulative volume line that adds or subtracts a multiple of the percentage change in a share price’s trend and current volume, that is based on the security’s upward or downward movements.This indicator is similar to the on-balance volume (OBV) indicator i.e. it measures cumulative volume and also provides traders with information about a security’s money flow.
The interpretations of the VPT can be summed up as follows:
An increase in price and volume confirms the price trend upward.A decrease in price and volume confirms the price trend downward.An increase in price accompanied by a decreasing or flat volume trend is a negative divergence suggesting that the downward price movement is weak and may reverse.A decrease in price accompanied by an increasing or flat volume trend is a positive divergence suggesting that the upward price movement is weak and may reverse.Below is daily chart of Bharat Heavy Electronics Ltd. which shows the VPT indicator:
4. Money flow index:5. Chaikin Money Flow Indicator:6. Accumulation/distribution:7. Ease of movement:8. Negative volume index:9. Volume-weighted average price:
