Introduction

Volume analysis helps us to study the number of stocks traded or futures contracts traded during a specific time. This volume analysis is undertaken by using volume indicators. This article will give you a brief understanding of the Volume indicator.

What are Volume Indicators?

Volume indicators are mathematical formulas which are presented in a visual form on charting platforms. 

A different formula is used by each indicator and you should select the indicator that works best for you. The Volume indicators can help in the trading decision process.

Importance of Volume Indicators

• They act like trend indicators. They can determine the current trend.

• Volume indicators also help in the technical analysis of stocks. They confirm the trends and patterns derived from other methods.

• If you are an investor you can use volume indicators to gain knowledge about how many shares are being traded in the markets at a given point in time. This helps to understand the overall perception of the investors towards the market.

• It can help you to determine the price movement in the stock. It gives you early signals if the current trend in a stock’s price movement will continue or reverse.

How Do Volume Indicators work?

Volume indicators help you understand what investors’ perception is about a specific stock. This is done by calculating the number of traders that are interested in buying or selling the stock at any given point in time. The indication of negative perception means the stock price may decline in a short time and it can show a bearish pattern. Whereas if investors have a positive perception of the stock then its price may go up and it can reflect a bullish pattern in a short time.

We can understand this with an example. If the volume indicator is showing a very high volume for a stock as compared to its moving average, then it may be due to fear or euphoria. If the buyers are in high volume it indicates euphoria. But if the sellers are more than the buyer for a particular stock then it indicates fear.

Types of Indicator

As of now, you have understood the importance of volume indicators, let’s now understand some common types of volume indicators and their importance.

On balance Indicator

Image Source:- https://cdn.wallstreetmojo.com/wp-content/uploads/2022/02/On-balance-volume-indicator.jpg

It’s a simple and effective indicator. Here the volume is added when the market closes higher or it is subtracted when the market closes lower. This gives us the running total and shows which stocks are being accumulated. It can also show divergences. This happens when the price rises but volume is increasing at a slower rate or even beginning to fall.

Chaikin Money Flow

Image Source:- https://img.phemex.com/wp-content/uploads/2022/03/02075918/bullish-divergence-using-Chaikin-money-flow.jpg

An increase in stock price shall be accompanied by rising volume. Going by this analogy Chaikin Money Flow focuses on expanding volume in the case where prices finish in the upper or lower portion of their daily range and then it provides the value for the corresponding strength.

Where closing prices are in an upper portion of the day’s range and volume is expanding then values will be high. In case where closing prices are in the lower portion of the range, values are tend to be negative.

Klinger Oscillator

Image Source:- https://c.mql5.com/18/72/Klinger_Oscillator.png

Fluctuations above and below the zero line can be used to aid other trading signals. The Klinger Oscillator sums the buying and selling volumes for a given period.

Some other popular volume indicators are the Money flow index, Volume RSI, Accumulation Distribution indicator, Balance of power, Ease of movement, Negative volume index etc.

Conclusion 

Volume indicators are one of the important technical parameters for traders and investors. Traders shall study them and apply them to improve their trading.