Volume Based Indicators

A trader will analyse volume to get a measure of the strength of a market move. The perceived strength of an up or down price move depends on the amount of volume that is traded during that time period. The higher the volume, the more significant the price move will be considered. The most important price moves will often come on a spike in trading volume. Volume based indicators can help traders prepare for a breakout from a trend. Also, periods of consolidation and low volatile range trading will be identified by periods of low volume.

The chart below is showing the March Crude Oil futures contract. We are using a volume based technical analysis tool underneath the chart and it can clearly be seen that the major market sell off of the day is not only represented by the move down in price but also a large spike in volume of contracts being traded over that time period.

Technical traders always endeavour to identify a strong trend to trade and a volume indicator is a good tool of this purpose. It can be said that an upwards movement in price is a strong trend if the volume being traded increases as the price heads up and sessions where the price decreases are associated with lower volume. The opposite is true for a strong downtrend.

Conversely, when prices are going up and the volume being traded is decreasing, this means that the trend is petering out and is unlikely to continue. Prices will either begin to increase at a slower rate or begin to fall. Therefore, a volume indicator can be useful for identifying exit points when a position had been put on to follow take advantage of a trending market.