What volume indicators are
These are indicators based on trading volume — the quantity bought and sold in a period — to assess the force behind a price move. The general idea is that a move accompanied by large volume is usually more trustworthy than one on small volume. This group includes on-balance volume, volume profile, volume-weighted average price, and a few accumulation-distribution indicators.
On-Balance Volume (OBV)
OBV accumulates volume by price direction: for each period closing higher than the previous, add that period's volume to the total; for each closing lower, subtract it. A rising OBV line shows volume leaning to the upside, a falling one to the downside. It's used to see whether volume force confirms the price direction.
Volume Profile
Volume profile shows at which price zones traded volume concentrated, rather than over time. A price zone with large volume is usually where the market found much agreement, and often acts as an important price zone when price returns.
Volume-Weighted Average Price (VWAP)
VWAP is the volume-weighted average price over a period, usually computed intraday. It shows the average price at which most volume traded, and is often used as a reference to judge whether current price is high or low relative to the period's overall level.
Some other volume indicators
The accumulation-distribution line combines price and volume to estimate money flow in and out. Chaikin money flow and the money flow index are variants measuring buy-sell pressure based on volume.
Why it matters and how to apply it
Volume adds a second dimension to price analysis: not only where price goes, but how much force is behind it. A breakout accompanied by surging volume is usually more trustworthy than one on thin volume. However, volume data isn't always complete or reliable in every market, especially some OTC markets, so use it carefully.
Common mistakes
- Ignoring volume when judging the reliability of a breakout.
- Trusting volume absolutely in markets where volume data is incomplete.
- Mistaking a fleeting news-driven volume spike for durable force.
- Using several redundant volume indicators instead of understanding one deeply.
FAQ
- Why does volume matter? Because it shows the force behind a move; price with large volume usually reflects broader participation.
- What is VWAP for? As a volume-based average price reference, helping judge current price against the period's trading level.
- Is forex volume reliable? Use caution, because the decentralized forex market has no centralized volume like a stock exchange; figures are usually from a single broker.
Checklist
- ☐ Is my breakout confirmed by volume?
- ☐ Does the market I trade have reliable volume data?
- ☐ Am I mistaking a fleeting volume spike for durable force?