There are volume indicators In technical analysis, that are built into the MT4 platform. This indicator may rarely use by traders because they do not understand its functions and how to use it.
But referring to the experience of one trader who sharing his ideas in the forex community. Volume indicators in technical analysis are powerful by combining other indicators such as a stochastic oscillator.
The reason to use volume indicator based on a theory by John J Murphy. In his book in title “Technical Analysis of the Financial Markets,” he writes if “Volume is the number of entities traded during the time period under study”
Well, in this article we will talk about volume indicators. Might this will interesting.
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Volume indicator explained
Chart by MT4
A volume indicator is an indicator that shows the number of transactions that occur in trading activity during a session.
In simple terms, the total contracts sold or changed hands during a particular session.
Volume is recorded in the form of bars known as Volume Bars. This indicator in the MT4 platform will be attached to the bottom of the chart in a new window.
A high Volume Bar menu indicates a large number of trades at that time, or it can also be said to indicate a large participation interest.
Meanwhile, a short bar reflects the minimal amount of activity or a lack of interest from market participants.
Volume indicator in forex
The volume indicator in the forex market shows the interest of traders or investors in a particular currency pair. Volume in the forex market is not measuring in the number of contracts traded or the size of the contracts, because forex trading is not as centralized as trading stocks.
Therefore, the actual Volume indicator is rarely used in the forex trading market. Most traders only know indicators exist in MT4, and some don’t even know how to use the Volume indicator. Some experts state the reason, this to be because the Volume indicator in the forex market does not actually represent the volume on the market.
Volume indicator in stocks
In the stock market, the Volume indicator can show you exactly how many shares have changed hands over a period of time.
This measurement of the number of transactions can be carried out because of the centralized nature of the stock market. So it can be seen how many total shares of a company are, as well as the number of shares that are being traded at that time.
Therefore some traders argue that using volume indicators in technical analysis stock trading is considered more effective than in forex.
Because the volume bars in the MT4 platform do not show the actual volume of transactions on the global market but rather represent the volume of transactions in the broker itself. So you might meet the volume bar in one broker is different length with another broker at the same time.
Useful volume indicators
Theoretically, volume indicators in technical analysis can be used to help analyze currency movements. The use of volume indicators includes:
- Detect market trend saturation.
- Measure the strength of a trend.
- Confirmation breakout trading strategy.
Detect market trend saturation with the volume indicator
The movement of the market trend will not always be in one direction. There will come a time for the movement to weaken to cause a reversal.
Using the volume indicator, this condition can be detected earlier.
The indication is when the price moves in a trend, both uptrend, and downtrend. Then accompanied by the volume that continues to decline, the sign is a short volume bar, so most likely the market will reverse.
This is often known as a saturated, overbought, or oversold trend.
Measuring Trend Strength
Volume indicators in technical analysis can also be used to measure the strength of market trends.
An increasing transaction volume indicates the high level of trading by market participants on current price movements. If the high trading volume is in the direction of the trend, it can be concluded that the trend will be a strong trend.
When there is a strong trend movement in one direction, usually you will see an increase in the value of the Volume indicator.
Then when there is a reversal in the opposite direction, the volume will also decrease. The direction of the market and volume can be a signal that there is a high probability that the trend will continue.
Signal confirmation in breakout strategy
In the breakout strategy, the problem that often occurs is a false breakout. To minimize the impact of a false breakout, traders will usually wait for a pullback candle to confirm whether the breakout is strong or a false breakout.
However, the volume indicator can also have a function to signal a breakout confirmation. The method is actually the same as using a volume bar to measure trend strength.
If a breakout condition has occurred, where the support or resistance area has succeeded in a breakout. Then the trader will look at the volume indicator for confirmation, if the volume bar increases, there is a chance that the breakout is valid. On the other hand, if the volume bar is small, it’s probably just a false breakout.
List of volume indicators MT4
If you are using the MT4 platform, there are three types of volume indicators in the list, but there are actually more than four types of volume indicator lists.
In the MT4 platform, there are four kinds of volume indicators, Accumulation/distribution, Money flow index, On balance volume, and volumes.
Below the following is a complete list of volume indicators:
- OBV (On-Balance Volume) indicator.
- Accumulation/distribution.
- Volume-weighted average price.
- Volume RSI.
- Money flow index/
- Volume price trend indicator.
- Chaikin money flow indicator.
- Ease of movement.
- Negative volume index.
OBV (On-Balance Volume) indicator
Below is the appearance OBV indicator, the indicator line formed in the new window below the main chart.
Tradingview
The On Balance Volume indicator founded by Joe Granville, it’s being popular since published in his book Granville’s New Key To Stock Market Profits.
The basic concept of the OBV indicator is the amount of volume that indicates price changes.
The calculation OBV formula: If today’s closing price is greater than yesterday’s close, then:
On Balance (i) =OBV(i-1)+Volume (i)
If today’s close is smaller than yesterday’s close, then:
On Balance Volume(i) =OBV(i-1)-Volume (i)
If today’s closing price is the same as yesterday’s close, then:
On Balance Volume(i)=OBV(i-1)
With the following information: OBV (i) is the current OBV value, Volume (i) is the current volume, and OBV (i-1) is the OBV value in the previous period.
The OBV trend goes up or down in accordance with the direction of the price movement trend. Because the OBV is considered to be preceding price movements, if the OBV trend breaks upwards it is a signal to buy, whereas if the OBV breaks downward it is a signal to sell.
Tradingview
Accumulation/Distribution
This indicator is a variant of the On Balance Volume indicator. Also available on the Mt4 platform. The Accumulation/Distribution indicator function is to determine which trend dominates the market. Whether it is bigger buyers or sellers and is useful for confirming price changes by measuring each sales volume.
When the Accumulation / Distribution indicator is getting higher, it means that there is an accumulation of buyers of a certain security, because the sales volume is related to an upward trend in prices.
When the indicator goes down, it means the seller’s distribution of the security, as most of the selling occurs during the downward price movement.
Tradingview
The image above is the accumulation/distribution indicator modified in the main chart from Tradingview. In the MT4 platform, this indicator appears below the main chart in a new window.
Stock analyst Marc Chaikin creating this indicator, He also creates the Chaikin Oscillator and the Chaikin Money Flow indicator.
Volume-weighted average price
Volume-weighted average price indicator is not available on the default MT4 platform, you may need to download it and install it on your MT4.
This indicator serves to measure the average price which is weighted by volume. Its function may be similar to the moving average, if the price is above the VWAP the price tends to be in an uptrend. Conversely, if the price is below VWAP, the price tends to be in a downtrend.
Tradingview
This indicator is one of the list volume indicators, which is also a lagging indicator because it is often late in giving warning signals.
Volume RSI
RSI volume is a combination of the volume indicator with the RSI. With a function to find oversold and overbought. Apart from that, it is to determine both bullish and bearish signals.
Tradingview
To read RSI volume as overbought if the volume bar is above the 70 levels and oversold if the volume bar is below the 30 levels.
Meanwhile, to determine the trend is if the volume bar is below level 50 then it is a downtrend, conversely if the volume bar is above level 50 then an uptrend.
Money flow index (MFI)
The Money Flow Index or MFI indicator is an oscillator indicator that is useful for measuring buyer and seller pressure.
This indicator is similar to the Relative Strength Index (RSI) indicator. Where the MFI value is a plot within levels from 0-100, which gives signals of overbought, oversold, divergence, and swing failure.
Tradingview
To determine overbought and oversold levels by looking at the 20 and 80 levels, if the MFI line is above or below the level above, it is an indication of a weakening or oversold and overbought.
While the divergence is by looking at the direction of the RSI line against the price.
Volume price trend indicator
Price Volume Trend (PVT) is a momentum indicator that is useful for measuring money flow.
PVT is one of the lists on volume indicators similar to On Balance Volume (OBV) which measures the accumulation of volume.
The difference is if the OBV increases or decreases the value of the total daily volume of prices. Meanwhile, PVP only adds or reduces a portion of the daily volume.
Price Volume Trend (PVT) can provide a signal to confirm the trend and possible divergent signals.
Tradingview
The PVT indicator is considered to some traders more accurate than OBV because it emphasizes price volume and reflects the overall trend. Meanwhile, divergence allows getting signals through the direction of the indicator line.
Chaikin money flow indicator
The Chaikin money flow indicator is one of the lists of volume indicators that functions to measure the volume of money over a certain period of time. Chaikin money flow (CMF) was invented by Marc Chaikin. The indicator describes a metric to measure the volume of a security.
The values stated in this indicator are 1 and -1 which are used to further measure changes in buying and selling pressure and help determine the next trend signal.
Tradingview
The way to read the CMF indicator is to look at the line, if it is near level 1 the buying pressure is higher, conversely, if it is near level -1 then selling pressure is higher.
Ease of movement indicator
Ease of movement is one in the list of volume indicators designed to measure the relationship between volume and price. An easy understanding to read is if the indicator line is above the positive level the price tends to be bullish, and if it is below the negative the price tends to be bearish.
Tradingview
his indicator is used to determine the direction of the trend, by reading:
- If the range is wide and the volume is low, the indication is a high trend.
- If the range is narrow and volume is high, the indication of a trend is low.
Negative volume index
Negative Volume Index (NVI) is an indicator used to analyze bullish and bearish markets by following smart money. Paul Dysart found that this indicator uses volume data to analyze smart money trading.
The basic idea is that smart money will use low volume to start taking positions to increase the price and then decrease if the price decreases at low volume.
Tradingview
Volume and volatility indicators
Volume and volatility indicators are indicators used for scanning volatility. Since volatility is synonymous with increasing volume, traders can use volume and volatility indicators.
Some expert modifiers maybe create indicators to calculate volume and volatility.
However, traders can also use a combination of volume indicators in technical analysis with other indicators, for example, the Bollinger band which also functions to measure price volatility.
In high volatility does not actually indicate the direction of the trend. But it is only an indication that there is an increase in trading volume in the market.
Meanwhile, what determines the direction of the trend is the ratio of demand and supply volume, higher demand causes prices to rise, higher supply causes prices to fall.
Using volume indicators to improve trading
In creation, The volume indicator is primarily to determine the volume of trading on a trading asset. Unfortunately, the forex market occurs over the counter, not as centralized as the stock market. So the trading volume from one broker to another can be different. Because it takes a different segment of data.
However, the Volume indicator usage is still widely to help traders carry out their trading strategies.
By looking at the volume of the indicator it is also possible to find when the trend is already exhausted due to a decrease in trading volume.
How to use the Volume Indicator
The simple way to use the volume indicator is to pay attention to the direction of the trend and the volume of the indicator itself.
In the list of volume indicators, there are several options that can be used, but this explanation only uses indicator volumes that are available on almost all platforms including MT4.
Let see the appearance indicator volumes on the image below:
In the image above is the volumes indicator below the main chart in a new window. The green line shows the up value and the red line shows the down value.
Broadly speaking, how to use this indicator refers to the following rules:
- If the price is rising, and the volume up, it is a signal bullish.
- But if the price rising and the volume down, it is a bearish signal.
- If prices are down and volume is down, it is a bullish signal.
- But if the price down and the volume goes up, it is a bearish signal.
Let analyze the chart below GBPUSD on H1
From the image above, we can see that trend changes have a relationship with the volume bar indicator.
When the trend is up and accompanied by a decreasing volume of the bar, then the price moves down. And when the downtrend is accompanied by an increase in the volume of the indicator bar then the price moves up.
Best volume indicator for day trading
Some of the lists of volume indicators in technical analysis that available may confuse newbie traders which one is the best. Especially best for day trading.
Some traders also have different opinions to determine the best one, because each indicator requires suitable market conditions.
Moreover, the volume in forex is segmented. It means that all trading volume is uncentralized. So there will be a volume error bias when comparing the volume indicator with the real market volume.
Someone argues that Chaikin money flow is the best with 77% accuracy. But other traders claim that using the volumes indicator, combined with the stochastic and moving average, can provide up to 80% winning trades.
Conclusion
Volume indicator can be important for you to know the increase in trading volume as well as a decrease in trades. This can give the strength trend signal and also the possibility that the trend will be ended.
However, it will not give satisfactory results if traders cannot with targets and risk management.
Maybe you believe that the best volume indicator is Chaikin money flow, but without ever training your skills, no matter how good the indicator will be useless. And just to remind if the market will different day by day.
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