Volume Based Analysis

 Volume analysis is an essential addition to the price analysis. In order to make an informative trading decision a trader must analyze both volume and price.

 Volume studies have not been so popular in technical analysis as price based indicators. The main reason of unpopularity is that only until recent years, volume data (quotes) were available to only a few traders. Yet, nowadays, when computer technologies are advancing fast, this is not a problem to obtain volume quotes far stocks, indexes, futures and other tradable commodities. Furthermore, over the past couple of years, volume based analysis started to develop into equally important to the price analysis part.

When it comes to the analysis stocks and other securities price movements, it is important to ask yourself, how this movement could be described. The answer is simple. There only two parameters that describe price movement: change in the price and volume traded during this price change. Respectfully, the logical output would be using volume and price based analysis together. By analyzing only price, the same as analyzing only volume, would lead to the situation when a trader sees only a half of the picture. Furthermore, this trader bases his/her trading decision on the half data and half analysis only.

In volume based technical analysis, the same as in price technical analysis, moving averages are the most basic and most used indicators. While most trading tools use simple and exponential volume moving averages, weighted volume moving average could be also met in some researches.

If by using price based indicators traders may see the current trend, see how volatile this trend is, how fast it moves and how far it is from the recent resistance and support levels, in volume based technical analysis a trader will be looking for volume surges (abnormal trading activity), for money flow (whether traders are injecting or pulling out money) and for bearish and bullish volume (money) accumulation.

The main difference between price and volume based technical analysis is that most of the price based indicators are lagging indicators (they state fact after it happens) and they are used to confirm a trend or to follow a trend. In opposite, the majority of the volume based indicators are leading indicators (predict possible development of future trend), however, you have to remember that the predictions do not guarantee the future trend. Therefore, as was mentioned above, only harmonic use volume and price analysis may provide clear picture of future trend.

The most popular volume based indicators are PVO (Percentage Volume Oscillator), SBV (Selling Buying Volume), Chaikin Money Flow, Accumulation/Distribution and OBV (On Balance Volume).

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