Volume
Definition and Key Features¶
Volume indicators are tools in technical analysis that assess the strength behind price movements by analysing trading volume. In forex markets, where traditional volume data is unavailable, these indicators often rely on tick volume – the number of price changes within a specified time frame – to gauge market interest and potential price momentum. For stocks and other securities, volume typically represents the number of shares or contracts traded. Volume indicators help traders understand the level of activity and confirm trends, as high volume can validate price movements, while low volume may indicate weaker or unsustainable trends.
Popular Indicators¶
Key volume indicators include On Balance Volume (OBV), which accumulates volume based on price direction to show buying and selling pressure, and the Chaikin Money Flow (CMF), which uses both price and volume to track buying pressure over a specified period. The Money Flow Index (MFI) is another popular tool, integrating volume and price to identify overbought and oversold conditions. Volume Oscillator and Price Volume Trend (PVT) are commonly used to measure volume changes in relation to price, indicating shifts in momentum.
Application and Interpretation¶
Volume indicators are used to confirm trends, identify reversals and measure momentum. High volume generally supports a price movement, indicating stronger trends or the likelihood of continuation, whereas low volume can signal caution. Traders might use volume indicators to detect potential breakout points or confirm trend strength before entering or exiting trades. By interpreting volume data, traders gain insight into market sentiment and can adjust their strategies to align with current activity levels, enhancing decision-making in both trending and ranging markets.