How to Use Volume in Trading Use Volume to Improve Your Day Trading

How to Use Volume in Trading Use Volume to Improve Your Day Trading

The chart below is of IndusInd Bank on the daily chart, the stock is in a sideways trend. We have marked an area of a price rise which was on falling, very low volumes which resulted in a subsequent fall. A price vs. volume analysis is a better way of understanding trends rather than looking at price or volumes alone. These days both day trading and robotic trading activity has increased which leads to high volume activity and thereby affecting quality volume analysis. Predicting breakouts is one of the most interesting use cases of OBV. The reason is that the OBV trendline behaves similar to the price trendline.

The cumulative total of the positive and negative volume flow forms the OBV line. By combining the direction of price with the relative volume of trades, the OBV line can give its users a sense of the strength of the trend at that moment. It can tell us about the likelihood of a trend continuing in the same direction. On-Balance Volume is a technical trading indicator that makes use of positive and negative volume flow to make predictions on the possible changes in a stock’s price trend. The concept behind On-Balance Volume was first developed by Joe Granville in 1963.

Solar Energy Stocks in India – 2022

What if we plotted a line which measures gain on a stock and volume to get one, clear, precise indication of a price strength. Have a look at this example of a strong move up, on weak volumes – It resulted in a subsequent fall. The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Similarly, the OBV is in a falling trend when each sequential peak is lower than the previous peak and each trough is lower than the previous trough. When the OBV is moving sideways and is not making continuous highs and lows, it is in a doubtful trend.

So, it is always good practice to follow the signal of simple moving averages and that is the reason you could find those color lines… The OBV line is simply a running total of positive and negative volumes. A period’s volume is positive when the close is above the prior close and is negative when the close is below the prior close. This can be seen as an indicator that the price will climb up further and breach the previous top. An advanced breakout, contrary to a non-confirmation, is considered to be a sign of strength.

The indicator is based on the logic that if there is a significant increase in the volume level without much change in price, then the price will eventually rise or fall. This is a running total of volume that relates price changes and volume and shows accumulation and distribution action. instaforex review Falling OBV along with rising prices indicates the uptrend may be weakening to a bearish reversal. However, in the case of a non-confirmation of a downtrend, the volume and price will stop moving in the same direction, that is, the price may break the last bottom but the volume may not.

OBV should always be used in the daily chart in correlation with the closing chart. On Balance Volume measures buying and selling pressure as a cumulative indicator that adds volume on up-days and subtracts volume on down days. When the security closes higher than its previous close, all of the day’s volume is considered up-volume. outsource programming When the security closes lower than its previous close, all of the day’s volume is considered down-volume. The most ignored information on market volume is the most useful information for trading with an edge. The volume provides support, confirmation or confidence, whatever you may call it, to the direction of the trade.

OBV or On Balance Volume indicator is used in technical analysis to measure buying and selling pressure.

However, keep in mind that even though a security is overbought or oversold it can remain in this state for an extended period of time. Volume Accumulation Percentage Indicator is a variation of the classic volume-accumulation indicators. It uses volume the same way as OBV except that it assigns volume weights based on intraday volatility. In a positive trend, if the stock price is close to a new high, the VAPI should be at its maximum as well (and vice versa for a negative… The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and retail investors.

The rate considered is the weighted average of trade execution rate and not the net rate after transaction charges and statutory levy. Arshad is an Options and Technical Strategy trader and is currently working with Market Pulse as a Product strategist. The Fast Stochastic, if you remember, is calculated by comparing the current price with the low of the look back period. Use indicators after downloading one of the trading platforms, offered by IFC Markets. A trend line can be drawn to watch for pattern similarities, regardless of the ongoing trend, if OBV and price are following the same direction. OBV can predict major highs and lows and can be particularly useful in measuring the breakout and breakout potential.

Momentum shows the rate at which prices of a stock are changing over time and helps identify a trend. Rising prices indicate a bullish momentum, and falling prices indicate bearish momentum. A price vs. volume analysis can also help in spotting momentum. When % R does not rise in tandem with the price or %R does not fall in line with the price, it is said to show a negative divergence. These signal a possible reversal in the current trend as seen in the chart for BATAINDIA.

How To Use The On Balance Volume (OBV) Indicator

Generally in a downtrend, the price is expected to decline along with the volume, with both making lower tops and lower bottoms. The graph here shows us how a declining OBV line can be used to identify a bearish trend. From this graph we can infer the strength of the bearish trend and the high possibility of this trend continuing. Always remember, ‘low volume’ is a relative term, it is compared to the volume of the last few days to judge whether it is relatively high or relatively low.

The overall direction of the On Balance Volume line helps traders understand the momentum. For example, if the OBV line is rising, it indicates a bullish trend. Technical analysts use past trading activity to make predictions about a stock’s future price movements. Volume is one of the metrics used in the technical analysis of stocks.

On balance volume measures the buying and selling pressure on a stock on a cumulative basis which subtracts volume on days the market trends down and adds volume on the uptrend days. People often use OBV to confirm price trends and also look for divergence between price and OBV. OBV is a cumulative technical trading indicator and must be used ideally in conjunction with other technical indicators to include all aspects of technical analysis.

What is On Balance Volume (OBV)?

One can spot patterns, support/resistance, retests etc on the OBV too. So, it is useful to anticipate good trades using OBV because breakout on the OBV is much likely to happen before the price breakout. It is also important to understand that these insights rely on predictions and it always comes with a probability which means it could go wrong on a few occasions. Follow-up buying needs to be clearly watched as the structure reflects the gradual interest of market participants.

When a bearish divergence forms, it usually means the price of the asset is likely to go down and vice versa for bullish divergence. OBV divergences are generally used to identify the market conditions of the asset and not to enter trade positions. The trading volume forms an important part of the analysis for trading. However, many traders use only price action to initiate trades. Also, most traders are not adept at interpreting raw volume data.

Limitations of OBV

The white line indicates the movement of VWAP wrt current price. On balance volume was developed by Joe Granville based on Charles Dow’s Volume Theory, and it is one of the first indicators to measure positive and negative volume flow. However, when a non-confirmation of uptrend occurs the price and the OBV line fail to correspond to each other. Here, the price will continue to rise and make a higher top, but the OBV line fails to make a higher top. This means that although the price is increasing, the relative volume of trades is not supporting this price increase.

This type of non-confirmation is generally seen at the end of a downtrend. The chart here depicts a divergence in the price and OBV lines. Both the OBV line and the price line can be seen to be moving in two opposite directions. Alternatively, a decrease in OBV reflects a negative volume pressure which in turn may signify a drop in prices. Traders should use the OBV in conjunction with other technical indicators to maximize their odds of success. For example, a negative day with 10,00,000 volume is not as significant if the next up day has 50,00,000 in volume.

• Moreover, a clear idea of the volume assists market participants in developing appropriate trading strategy.
• Analysts and traders use the divergences to showcase the possible results of buying against the incorrect prevailing trends in the market.
• Past performance cannot always be relied upon to predict future prices.
• It can tell us about the likelihood of a trend continuing in the same direction.

This signals a possibility of uptrend and breakout of price from trading range. This is a stage where smart money comes in the markets and process of accumulation begins. Greater details of price volume correlation include Volume Exness Forex Broker Introduction precedes price, rising Volume in uptrend and price volume divergence is explained here. We recommend to read it together with OBV to have deeper understanding as some of the terms used in current article, is well explained there.

For some stocks 1 Million trade is high while for others 10 Million is average. Since OBV is primarily dependent on volume, its absolute value will not make much sense. Interpretation of OBV is about direction of its movement, its momentum, its support and resistance and its divergence with respect to price.

Since OBV breakouts normally precede price breakouts, you should be prepared to buy OBV upside breakouts and short downside OBV breakouts. This week, I want to turn your attention to the On Balance Volume indicator first.It’s one of the few momentum indicators out there that can relate price change to volume. It is particularly useful for spotting accumulation or distribution during periods of price consolidation. With time, as more and more research came into the subject, the theory of on-balance volume was developed that soon became an indicator in the technical analysis of securities. The OBV is primarily traded on stocks as well as indices, commodities and Forex. It is a pure momentum oscillator, such as RSI, whereas pattern analysis can be combined with OBV to increase signal robustness.