A look at volume based indicators

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A Look At Volume Based Indicators

Volume Indicators For Binary Options

Volume is a well known indicator of market direction. The number of people involved in a given movement, relative toe the number of people involved on an average basis, is an key metric defining the strength or lack of strength in the market. The trouble is that tracking changes in volume on your own on other than very basic level can be quite messy. Fortunately for us there are a number of volume based indicators that can be of service to us. These tools are great methods of finding trend following signals as well as potential areas of reversal.

On Balance Volume

On Balance Volume or OBV for short is an indicator developed in the 1960’s by Joseph Granville. He believed, and rightly so, that a change in underlying volume without a representative change in stock price, was an indication of future movement. His theories were incorporated together to form this indicator which compares the closing prices of two consecutive trading sessions. If the price on the second day is higher than that on the first that days volume is considered “up volume” and added to the previous day’s reading. If the second candles close is below the first day that volume is considered to be “down volume” and subtracted from the previous days reading. Over time the indicator will display convergences and divergences that are timely indications of potential market reversals.

The Volume Oscillator

The Volume Oscillator is a basic volume tool that uses two moving averages to create its plot. There is one fast and one slow moving average, usually 14 and 28 bars respectively. The fast moving average is then subtracted from the slow moving average to create the indicator. An increase in volume associated with an increase or decrease in prices shows strength in the underlying trend. Likewise, a decrease in volume can show an underlying weakness. In this way the indicator can confirm trends, predict breakouts and reversals and produce trend following signals. Because of the way in which this indicator is derived it can change direction very quickly, making the longer term analysis ie peaks and troughs, more valid.

The Force Index

The Force Index is a tool derived by Dr. Alexander Elder and described in his book “Trading For A Living”. This is a great book and a recommended read but that is another story. This indicator uses volume and price action to produce a reading of the strength, or “force”, of a movement. Dr. Elder believes that three things account for market movement; direction, extent and volume and this indicator takes all three into account.The formulation is very simple. The close of the current period is subtracted from the close of the prior period and then multiplied by the volume, thus if today’s close is higher the resulting number will positive and if today’s close is lower the reading will be negative. The bigger the move and the bigger the volume the more force behind the move. While not as good for determing direction from day to day, or bar to bar, it is a great tool for measuring trend strength through convergence/divergence and for identifying areas of potential reversal.

Volume Flow Indicator

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The Volume Flow Indicator is considered by many to be an improvement on the OBV, which is already a decent indicator. The major differences are in how the data is derived and then how it is displayed. Unlike OBV which compares two closing prices and then simply adds or subtract volume the VFI uses a more complex calculation. First, the VFI uses “typical” prices, which is the average of the high, low and close. This is then applied to volume to produce a positive or negative reading with certain cut off limits that are intended to smooth out wild swings in volume. This is then smoothed again using a moving average, usually 50 bar, to produce a super smooth oscillator that travels above and below a central zero signal line. This indicator is easier to use than the OBV because it produces less whipsaws but also means you may have to wait a little longer for a signal to fire. Like with all oscillators this one is good for a number of different type of signals including divergence, convergence, support and resistance, trend strength and crossovers.

volume based indicators produce similar signals but not all are the same.

My Last Thoughts

These are all great tools and incredibly useful for traders. However, I think that VFI is the best and easiest to use. The formulation is more complex but with the smoothing creates an easier to read indicator and one that will produce far less false signals. If you look at my graphic above you can see that the first three indicators all produce a line that more or less follows the same path while the VFI produces a much different line that is more in tune with the underlying market trend. However, whichever you choose, I am sure it is easy to see just how well the addition of a volume based indicator can be to your strategy.

Price Volume Trend (PVT)

Contents

DEFINITION

The Price Volume Trend indicator (PVT) is a momentum based indicator used to measure money flow. PVT is similar to another technical analysis tool; On Balance Volume (OBV) in that it is an accumulation of volume. While the OBV adds or subtracts total daily volume depending on if it was an up day or a down day, PVT only adds or subtracts a portion of the daily volume. The amount of volume added or subtracted to/from the PVT total is dependent on the amount of the current day’s price rising or falling compared to the previous day’s close. Price Volume Trend (PVT) can primarily be used to confirm trends, as well as spot possible trading signals due to divergences.

CALCULATION

THE BASICS

Price Volume Trend (PVT) is used to measure momentum or buying and selling pressure. When price adjusted volume on up days outpaces price adjusted volume on down days, then PVT rises. When price adjusted volume on down days outpaces price adjusted volume on up days, then PVT falls. What this means is that when PVT is up, buying pressure is up and when PVT is down, then selling pressure is up. The basic theory behind the Price Volume Trend indicator is that volume precedes price. This is significant because it allows the PVT to be used for a couple of different purposes. It can be used for general trend identification or confirmation. It can also be used to anticipate price movement after divergences.

WHAT TO LOOK FOR

Trend Identification

Price Volume Trend (PVT), much like On Balance Volume (OBV), is useful for identifying or confirming overall market trends. This can be helpful for confirming signals or setups generated by additional signals which rely on being able to identify trend in order to be effective. Also, based on the theory that swings in positive or negative price adjusted volume flow (buying and selling pressure) precede changes in price, PVT can also identify potential trend reversals. Many technical analysts believe that PVT is a more accurate representation of market conditions because of the fact that the volume is price adjusted. Frequently, PVT mirrors market price movements very closely.

Divergence

Divergence occurs when price movement is not confirmed by the indicator. In many cases, these divergences can indicate a potential reversal. Especially considering the premise behind the PVT indicator which is positive and negative price adjusted volume swings precede changes in price.

Bullish PVT Divergence occurs when price declines but PVT advances.

Bearish PVT Divergence occurs when price advances but PVT declines.

SUMMARY

Price Volume Trend (PVT) is a good technical analysis tool for measuring buying and selling pressure. Many people believe that buying and selling pressure precedes changes in price, making this indicator valuable. Divergences especially, should always be be noted as a possible reversal in the current trend. Keep in mind that this indicator is very similar to the On Balance Volume (OBV) indicator. However, it is often viewed as being more closely tied to current price movements because it accumulates price adjusted volume rather than total volume. As with most indicators however, it is best to use PVT with additional technical analysis tools.

HOW TO USE IN TRADINGVIEW

  1. Navigate to https://www.tradingview.com/
  2. On the landing page, enter a symbol and click “Launch Chart”
  3. Within the Toolbar along the top of the chart select “Indicators” and choose the one you would like to add to your chart.
  4. To make changes to your Indicator you will need to access the Formatting Window.
  5. You can access the Formatting Window by either clicking on the Blue “Format” button in the Chart Header next to the Indicator name, or by right clicking on the Indicator in the chart itself and selecting “Format”.

STYLE

Can toggle the visibility of the PVT as well as the visibility of a price line showing the actual current value of the ADL. Can also select the ADL’s color, line thickness and visual type (Line is the default).

PROPERTIES

Last Value on Price Scale

Toggles the visibility of the Indicator Value on the vertical axis.

Arguments in Header

Toggles the visibility of the indicator’s name and settings in the upper left hand corner of the chart.

Scaling

Scales the indicator to either the Right or to the Left.

Volume Indicator

Indicators and Strategies

Volume Indicator

Volume points to the amount of a financial instrument that was traded over a specified period of time. It can refer to shares, contracts or lots. The data is tracked and provided by market exchanges. It is one of the oldest and most popular indicators and is usually plotted in colored columns, green for up volume and red for down volume, with a moving average. It is one of the few indicators that is not based on price. High volume points to a high interest in an instrument at its current price and vice versa.

A sudden increase in trading volume points to a increased probability of the price changing. News events are typical moments when volume can increase. Strong trending moves go hand in hand with an increased trading volume. It can therefore be seen as a measure of strength. One would expect high buying volume at a support level and high selling volume at a resistance level. There are several ways to use volume in a trading strategy and most traders use it in combination with other analysis techniques.

Delta Volume Columns Pro displays delta volume information calculated with intrabar inspection. My Delta-Volume-Candles showed delta volume on the chart; this indicator provides a pane version which allows for more detailed information to be displayed. It can show stacked buy/sell/neutral volume columns, or a volume balance line which can be calculated and.

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