Strategies for Trading Volume
The most accurate way to measure money flow is the number of shares bought and sold daily in any financial instrument known as volume. For those new to the market, money flows are used by traders to determine overall supply and demand characteristics or financial instruments in an attempt to predict future direction.
High volume indicates that there is increased interest in the name, and if it is combined with an increase in share price, it is often used as an indication of strong upward momentum. Keeping an eye on volume will ensure you are on the right side of the trade. Each of the indicators discussed below uses volume as a primary input and will give you a practical view of how to incorporate volume into your trading strategy.
A closer look at the volume
Delta Air Lines, Inc. shown below. If you take a look at the chart of (DAL), you can see a huge increase in volume on September 10, 2013, thanks to the announcement that the company will join the S&P 500 stock market index. . A strong move in the share price, coupled with an increase in volume, suggested renewed interest in the stock and initiated a strong move.
In general, it’s good to align strong growth in volume with a strong shift in a company’s fundamentals. In the case of delta, the addition of the S&P 500 suggests that large index funds and mutual funds will add positions. That will add a layer of underlying demand that will drive up prices. A screen for spikes in volume would have brought this stock to the attention of active traders.
On balance volume
The on-balance volume indicator, commonly referred to as OBV, is used to detect stocks that are experiencing sharp increases in volume without significant changes in stock price. When institutional investors start buying stocks, one of their goals is to avoid price increases so that they can keep their average entry price as low as possible.
This is where the OBV indicator comes in extremely handy. Before going into the example, it is important to note that the indicator is calculated by adding the volume to the previous OBV value when the most recent close price is higher than the previous close price. If the closing price is lower than the previous close, the volume is subtracted from the previous OBV value.
Now, let’s study an example:As you can see from the chart of Microsoft Corporation (MSFT), the price was between $34.80 and $37.00 in overdue 2013 and early 2014. See how the OBV indicator rose sharply during this period. A rising OBV indicates that traders were becoming bullish on the stock and a stock screen for rising OBV values would have allowed active traders to get in early before it hit $41.11.
Volume by price
Another common strategy that uses volume is to use volume as a price indicator. In most cases, volume is plotted at the bottom of the chart as shown in the examples above.In the case of extent with the aid of using rate, it’s far plotted at the vertical axis in order that a dealer can get an concept of the extent traded at numerous rate points. Levels of extreme volume can be used to identify areas where smart money has decided to actively pursue a position. Strong volume moves at key price points are used by active traders to identify key areas of support and resistance and when combined with other indicators can create strategic buy/sell signals.
As you can see from the AmerisourceBergen Corporation (ABC) chart, the highest trades in 2014 took place between $71.50 and $73, which is identified by volume through the price indicator (the blue bar used to illustrate key trading ranges). If a broader market sell-off breaks out, traders will expect the stock to find support near $73. Notice how volume between $74 and $76 was reduced due to this gap. Traders expect less support from buyers in these areas in the event of a pullback.
The Bottom Line
Another common strategy that uses volume is to use volume as a price indicator. In most cases, volume is plotted at the bottom of the chart as shown in the examples above.In the case of extent with the aid of using rate, it’s far plotted at the vertical axis in order that a dealer can get an concept of the extent traded at numerous rate points. Levels of extreme volume can be used to identify areas where smart money has decided to actively pursue a position. Strong volume moves at key price points are used by active traders to identify key areas of support and resistance and when combined with other indicators can create strategic buy/sell signals.
As you can see from the AmerisourceBergen Corporation (ABC) chart, the highest trades in 2014 took place between $71.50 and $73, which is identified by volume through the price indicator (the blue bar used to illustrate key trading ranges). If a broader market sell-off breaks out, traders will expect the stock to find support near $73. Notice how volume between $74 and $76 was reduced due to this gap. Traders expect less support from buyers in these areas in the event of a pullback.
Top FAQs Of Volume Based Trading Strategy
What is volume in trading?
Trading volume refers to the total number of shares or contracts traded during a given time period. It assists traders in determining the magnitude of a price fluctuation by acting as a crucial indicator of market activity and liquidity. While low volume may suggest that investors are not as enthusiastic, high volume frequently indicates considerable interest in a security. Gaining an understanding of volume might help you spot possible pricing fluctuations and market patterns.
Why is volume important in trading strategies?
Since volume is a major indicator of market activity and liquidity, it is essential to trading techniques. Strong interest in a certain item is frequently indicated by high trading volume, which implies that price fluctuations are more likely to be consistent and dependable. Traders can learn more about the strength of a trend by examining volume in conjunction with price changes. For example, a price increase with high volume may signal a strong upward trend, but a price increase with low volume may reflect traders’ lack of commitment. Furthermore, because abrupt increases in volume frequently precede notable price changes, volume can be used to spot possible reversals or breakouts.
What are some key volume indicators?
- Volume Weighted Average Price (VWAP)
- On-Balance Volume (OBV)
- Accumulation/Distribution (A/D) Line
- Chaikin Money Flow (CMF)
What are some common volume-based trading strategies?
- Breakout Trading
- Volume Spikes and Exhaustion Moves
- Trend Confirmation using OBV
- Divergence Strategies
How to identify strong trends using volume?
Using volume analysis to find strong trends entails closely examining trading activity to find patterns that show how strongly a market is moving. Significant volume surges that coincide with price movements are frequently sought after by traders since they can indicate the strength of a trend. For example, when a stock’s price rises and its volume noticeably increases, it indicates that a large number of people are buying into the trend, which strengthens it. On the other hand, a low volume price movement could be a sign of little interest or support and could portend a reversal. Traders can obtain important insights into market mood and make better decisions about entering or quitting positions by examining volume in tandem with price fluctuations.
How can traders use VWAP for intraday trading?
By examining price changes in proportion to volume over the course of the trading day, traders may make good use of the Volume Weighted Average Price (VWAP), a crucial tool for intraday trading. Since the VWAP is a benchmark for figuring out if a stock is trading above or below its average price based on volume, traders can use it to find possible entry and exit opportunities. While a price below the VWAP may represent a bearish trend and possible selling opportunities, a price above the VWAP may show a positive trend and suggest that traders should think about buying. Additionally, as VWAP represents the average price at which a security has traded during the day, it can assist traders in evaluating market mood and making wise choices.
How do institutions use volume to manipulate markets?
Institutions use volume in a variety of ways to affect market dynamics. These organizations can produce impressions of supply and demand that might not fairly represent the underlying fundamentals of the assets involved by deliberately raising or lowering trade volumes. An abrupt spike in trading volume, for example, may indicate to other market players that a certain asset is becoming more popular, which might result in more interest and investment. On the other hand, a decline in volume might indicate a lack of interest or confidence, which would cause other investors to sell or withdraw their shares. Significant price swings may result from this volume manipulation, giving institutions the opportunity to profit from these changes while also influencing the mood and actions of the market.
