Volume Based Trading Techniques (Volume Indicators)

Volume Based Trading Techniques (Volume Indicators)

Investors aren’t happy with most technical indicators, because their data is unstable. Demand and supply force the market. Learn how traded volume plays a crucial role in forecasting price action. Let’s start from the basics.


What is Volume in the Stock Market?

Volume refers to the number of shares traded over a specified period: 1 minute, 1 hour, 1 week, 1 month, or any other period.

In the stock market, volume refers to the number of shares traded over a specified period. Therefore, the volume is often shown corresponding to the timeframe – which could be 1 minute, 1 hour, one week, one month, or any time frame we choose to trade.

Nearly every trading platform has a volume indicator below the price chart, usually as a bar chart. These bars are color-coded to correspond with whether the price action was bullish or bearish during that specific timeframe.

For example, a green bar in the volume section indicates that the price closed higher, while a red volume bar shows that the market was bearish during that time frame. We can also use the height of the bar to tell if the volume is increasing or decreasing. Volume can be an important factor in short squeezes, which is when a stock price moves rapidly higher.

The volume

Further reading

The Dow Theory: The Role of Volume

The volume confirms the respective trend.

The Dow Theory: The Role of Volume

If the volume increases, this ensures an upward trend with rising prices. On the other hand, the theory states that increasing importance with decreasing prices confirms a downward trend.

Therefore, the trend strength of the primary movement reveals volume information. This theory is the basis for volume analysis and volume indicators. Keep reading to learn more.

Further reading

Volume Indicators

Here are the top volume indicators for stock trading:

  1. On-Balance Volume (OBV) Indicator 

This indicator reacts to changes in price and volume. Let’s reveal the process of calculating the OBV. If a candlestick closes higher than the previous one, it adds the magnitude of the current candle to the last On-Balance Volume.

On the other hand, it subtracts from the volume when the current candle closes under the previous candle. This indicator’s purpose is to determine trend changes and to analyze divergences in the price. Liquidity flows into the security when the price rises, while liquidity is taken out of the stock when the price falls.

How to Trade the On-Balance Volume Indicator?

This indicator works in such a way that changes are first visible in the OBV before they are reflected by rising or falling stock prices. Thus, if the OBV breaks out upwards, you should open a long position. In the event of a breakout downwards, on the other hand, you should go short. We call this breakout trading.

Breakout trading

You can also use the OBV indicator to show trend reversals by showing divergences in the price and the indicator.

Following peaks the indicator then goes through an adjustment

Despite its prowess, critics of the OBV indicator note that it reacts with delay to significant changes in volume. For example, following volume peaks, the indicator as a cumulative value then goes through an adjustment period during which its significance is limited.

If the trading volume was high before and then falls, the development of the indicator weakens, and it becomes more difficult to identify changes in the direction of the OBV.

  1. Volume-Price Trend

The VPT is a momentum oscillator that considers the trading volume of a given stock. Steven L. Kille is an American chart technician who developed the volume-price trend indicator, and you can use it as a trend indicator.

In the VPT indicator, the price changes between two time frames are multiplied by the trading volume and cumulated with the corresponding result from a previous period. The individual values of the indicator constantly fluctuate from top to bottom, open above the zero-line, and are always positive on days with price gains.

Accordingly, these are negative on days with price declines, whereby the strength of the price change mainly determines the swing of the individual VPT values compared to the previous day. Thus, the VPT indicator is an excellent complement to other trend indicators.

How to Trade the VPT?

If the VPT indicator rises into positive territory, the trend is still steady. However, if it drops away from the positive zone, then the trend is weakening. If the VPT indicator continues to slide down into negative territory, the bearish trend will continue.

Similarly, if the VPT indicator continues to rise in negative territory, it signifies an end to the bearish trend. If the VPT indicator shows divergences, a trend change may be imminent.

  1. The Accumulation/Distribution Line (ADL) Indicator

The Accumulation/Distribution Line was developed by Mark Chaikin. The purpose of this indicator is to improve the predictions of the OBV indicator. In contrast to OBV, ADL uses a price-weighted volume fraction.

Thus, the higher the price changes in the underlying asset, the higher the volume share used in the calculation. The theory behind the ADL is that well-founded trend movements always accompany increasing volumes, i.e., because of the market’s increasing interest. If this parallel becomes unbalanced, it can lead to changes in the balance of power in the market and thus to a trend reversal.

The volume is a reliable leading indicator of impending breakouts from consolidation zones. The volume indicates an increasing flow of liquidity, which can lead to the establishment of a trend. It also points to a drying flow of liquidity, which leads to the end of a movement.

How to Trade the ADL Indicator?

The ADL aims to represent the flow of liquidity into the market. It characterizes high volumes by buying and selling pressure. Analysts who want to assess these two forces correctly cannot help but necessarily include volume in calculating an indicator, making the ADL ideal for identifying divergences.

If there is a disconnection between the price and the ADL, you can conclude that the existing movement will lose strength. This is because the volume involved in the price movements can no longer maintain the trend strength.

Price drops

  1. UDV (Upside-Downside Volume)

The upside-downside volume indicator, UDV for short, is based on the idea that the trading volume always develops according to the trend. So, as long as the sales volume is greater with price changes in the trend direction than with price changes against the trend direction, the trend is intact.

Like other volume indicators, the UDV, therefore, tries to detect divergences. An imminent end to the movement is in sight if the sales volume turns while the price trend remains the same. Therefore, you must always use the UDV indicator in conjunction with other indicators.

How to Trade the UDV?

If the UDV indicator is in positive territory and the price is in an uptrend, consider this trend as strong. Similarly, if the UDV indicator is negative and the price is in an uptrend, the movement is regarded as weak.

Conversely, if the UDV indicator is negative and the price is bearish, consider that trend to be strong. Furthermore, if the UDV indicator is in positive territory and the price is bearish, the movement is regarded as weak.

  1. Chaikin Oscillator (ChO)

The Chaikin Oscillator is a further development of the ADL. The ChO translates the changes in the accumulation/distribution line into oscillator signals. As we have mentioned, the ADL is an indicator that relates price changes and volume.

The ChO proceeds from Chaikin’s theory that volume is the originator of trend-oriented price movements. Accordingly, price changes accompanied by low volume are less significant than price movements with high volume. Therefore, helping us identify the strength and weakness of trends at an early stage.

The higher the closing price and the further away from the center, the stronger the buying pressure. If it is below the middle of the maximum range, there is selling pressure, and we call it distribution. The further away from the centerline, the larger it is.

Essentially, the ChO measures the accumulation/distribution line of moving average convergence/divergence (MACD). The indicator is designed to make changes in the momentum of the accumulation/distribution line visible at an early stage and present them with two types of signals.

In principle, this is an MACD indicator based on the ADL. For this reason, we can use ChO in the same ways as MACD.

How to Trade with the Chaikin Oscillator?

We recommend observing the trading signals that are only in the trend’s direction while using the ChO. Only consider buy signals in an uptrend and sell signals in a downtrend. When the ChO indicator rises above the centerline, we consider a potential buy signal. Contrarily, when the oscillator drops below the centerline, it indicates a possible sell signal.

Buy and sell signals


Typically, we derive most technical analysis indicators from price; volume is an independent quantity. Most traders are probably familiar with the classic volume indicator – displayed as the traded volume per period vertically in a subchart. As a rule, a steady upward trend occurs when rising prices accompany increasing volume.

The same applies to downward trends. In consolidation phases, the volume traded is usually lower. Always consider reading online reviews before investing in a stock or any asset class. Never was there a time when we got to access tons of credible information from reliable sources in a matter of seconds, as we can now.

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We hope you find this article helpful and informative. Let us know any questions or queries you have in the comments below. All the best! Want to learn more ways that volume can be used? High volume assets are important for the options scalping strategy.

Further reading