Volume Indicators

Table of Content

Volume Indicators Overview

Volume-based indicators give information about the amount of traded contracts or lots. Its one of the few types of indicators that base their value not solely on price. Volume obviously depends on the selected period.

The amount of a security that is traded at any given time can give an indication as to whether the trend is likely to continue or might reverse. It shows at which prices traders open their trades. An increase in volume usually precedes an emerging trend and a drop in volume usually precedes an ending trend.

Interesting situations are created when the price makes new highs or lows while the volume drops. This price – volume divergence could point to a trend reversal.

Volume is one piece of information that is often neglected by many market players, especially beginners. However, learning to interpret volume brings many advantages and could be of tremendous help when it comes to analyzing the markets.

There are many benefits of volume analysis: Firstly, it helps to confirm price trends and chart patterns, as it shows how much interest the security is attracting. Secondly, changes in volume tends to lead the price movements. And thirdly, the trend in a volume indicator over a long period is relevant to the price trends and helps determine when the price is losing momentum.

Volume Bars Illustration:
Volume Bars Indicator

Note: Make sure to ready our volume analysis guide before reading this one.


Our Best Chosen Volume Indicators

The LMD Indicator

Our team at AlgoStorm.com uses our own innovative volume indicator (It is called: LMD). You can access this indicator as part of your membership of AlgoStorm.

The LMD indicator is a premium momentum oscillator that takes trend, volume, volatility, and momentum into account.

  • It displays a unique momentum measure with better insights than the RSI.
  • It displays the open interest of the asset when it is available.
  • It clearly shows oversold and overbought levels.
  • It has lots of advanced options and extra optional features.
  • It can be used on all time-frames.

LMD Illustration:
LMD Indicator

To access our trading system, indicators, and strategies, join us at:
https://www.patreon.com/algostorm

The VTD Indicator

Our team also uses another volume-based indicator (it is called: VTD). You can also access this one as part of your membership of AlgoStorm.

The VTD indicator is a premium momentum volume-based oscillator that provides insight into the weakness or the strength of an asset.

It is mainly used to measure market momentum and to affirm trends or to anticipate possible reversals. It does this by effectively comparing the recent market momentum, with the general momentum over a wider frame of reference. It is very powerful for spotting divergences.

VTD Illustration:
VTD Indicator

To access our trading system, indicators, and strategies, join us at:
https://www.patreon.com/algostorm

Note: In case you like to trade with free volume-based indicators, this guide will cover the most notable ones.


Volume Profile

Volume Profile Definition

The Volume Profile is an advanced charting study that displays trading activity over a specified time period at specified price levels.

Essentially, Volume Profile takes the total volume traded at a specific price level during the specified time period and divides the total volume into either buy volume or sell volume and then makes that information easily visible to the trader.

Volume Profile Illustration:
Volume Profile Indicator

Typical levels of significance:

  • Point of Control (POC) – The price level for the time period with the highest traded volume.
  • Profile High – The highest reached price level during the specified time period.
  • Profile Low – The lowest reached price level during the specified time period.
  • Value Area (VA) – The range of price levels in which a specified percentage of all volume was traded during the time period. Typically, this percentage is set to 70% however it is up to the trader’s discretion.
  • Value Area High (VAH) – The highest price level within the value area.
  • Value Area Low (VAL) – The lowest price level within the value area.

Using The Volume Profile

Support and Resistance Levels:

The first thing that most traders will use volume profile for is identifying basic support and resistance levels. It is important to note that using Volume Profile as an identifier for support and resistance levels is a reactive method.

This means that unlike proactive methods (such as trend lines and moving averages) which are based on current price action and analysis to predict future price movements, reactive methods rely on past price movements and volume behavior.

Reactive methods can be useful in applying meaning or significance to price levels where the market has already visited. Basic technical analysis has shown that a support level is a price level which will support a price on its way down and a resistance level is a price level which will resist price on its way up.

Therefore, one can conclude that a price level near the bottom of the profile which heavily favors the buy side in terms of volume is a good indication of a support level. The opposite is also true. A price level near the top of the profile which heavily favors sell side volume is a good indication of a resistance level.

Volume Nodes:

High Volume Nodes (HVN) are peaks in volume at or around a price level. HVN can be seen as an indicator of a period of consolidation. Usually there is a great deal of activity on both the buy and sell side and the market stays at that price level for a great deal of time compared to other levels in the profile.

This can imply a “fair value area” for the asset. When price approaches a previous HVN (or fair value area) a sustained period of sideways movement is expected. The market is less likely immediately break through that price.

Low Volume Nodes (LVN) are the opposite. They are valleys (or significant drops) in volume at or around a price level. Low Volume Nodes are usually a result of a breakout rally or a breakdown.

During a rally or a breakdown, there will typically be an initial burst of volume and then a significant drop off. The drop off can imply an “unfair value area” for the asset.

When price approaches a previous LVN (or unfair value area), the market is much more likely to rally through or bounce off of that price level. Because it is seen as an unfair value area, the market will not spend as much time there compared to some other levels in the profile.


Volume Oscillator (VO)

Volume Oscillator Definition

The Volume Oscillator is an indicator made up of two Moving Averages (MA) surrounding volume, one being fast and the other slow. The slow volume MA value is then subtracted from the value of the fastlow Moving Average.

The Volume Oscillator measures volume by analyzing the relationship between the two Moving Averages mentioned.

Volume Oscillator Illustration:
Volume Oscillator Indicator

Volume Oscillator Calculation

The Volume Oscillator indicator calculates both a fast and slow volume moving average, which are set at different default settings.

The fast volume Moving Average has a default setting of 14, meaning a period of 14 days or weeks. The slow volume Moving Average, on the other hand, has a default setting of 28, meaning a period of 28 days or weeks.

Volume Oscillator Takeaways

The Volume Oscillator indicator oftentimes uses volume analysis to determine its values. Let’s dig a little deeper into two of these principles.

  • First, let’s analyze how an increase or decrease in price along with an increase in volume could potentially signal trend strength. In this case, it is key to analyze and follow the fast volume MA. If it is above the slow volume MA and the Volume Oscillator is above the zero line, the result may confirm price direction and market trend, whether it is in an uptrend or downtrend.

  • Next, we can look at how an increase or decrease in price along with a decrease in volume could potentially signal trend weakness. In this case, it is key to analyze and follow the fast volume MA. If it is below the slow volume MA and the Volume Oscillator is below the zero line, the result may warn the trader that price direction and the general market trend are weak.

Using The Volume Oscillator

When there’s a noticeable increase in price, Volume Oscillator divergences can occur. These divergences often come with a decrease in general volume, which traders should be acutely aware of.

When a divergence occurs, the fast volume MA is reportedly below the slow volume MA, and the Volume Oscillator is shown to be below the zero line Divergences, especially in cases like the one above, can often serve as a warning to traders and signal that current price direction is weak and there may potentially be a trend reversal in the near future.

The trader will see the resulting histogram fluctuate above and below the zero line, which helps project insights into the price trend and determine whether or not its direction is strong or weak.

Positive values are plotted above the zero line and they suggest that there is enough existing market support for the price to continue its current trend direction. Negative values, on the other hand, are plotted below and suggest that there is a lack of market support, which points towards price being stagnant or hinting towards trend reversal.

Limitations Of Volume Oscillator

It is always best to use multiple technical analysis indicators rather than sticking to a solid one indicator. You wouldn’t want to rely on a single indicator for market analysis, which is why we suggest using multiple indicators to aid your trades.

At the end of the day, no single indicator can be 100% reliable, so make sure you protect your money and interests by using various tools to get you to where you’d like to be.


Cumulative Volume Delta (CVD)

CVD Definition

The Cumulative Volume Delta (CVD) indicator is a trading indicator that measures liquid volume inflow for an asset. It was developed in the 1980s for the stock markets.

The Cumulative Volume Indicator is one of the newer indicators in crypto. The indicator was primarily used in the stock markets since the 1980s and was later adopted by crypto traders. Historically, it was used to monitor capital inflows on large stock market indexes such as the NYSE (New York Stock Exchange), Nasdaq, and S&P 500.

The indicator has historically kept track of all securities on the stock exchange, giving traders a macro overview of the markets. Because there is no crypto index, the CVD indicator can only be used for individual crypto pairs such as BTC/USDT.

The CVD indicator can be used as a momentum/trend indicator to determine if we’re in a bull market or a bear market and predict further price movements.

CVD Illustration:
CVD Indicator

Using The CVD

The Cumulative Delta indicator narrows down buy and sell volume for every crypto. It also rates it in a “delta” number which shows how much people are willing to pay for a certain crypto. The CVD indicator always starts at 0. The indicator often shows a number above or below zero, and it can sometimes be equal to 0 if the buy and sell volume is the same.

The Cumulative Volume Delta (CVD) indicator is not to be confused with the Volume Index or general volume indicators. Most volume indicators show the total volume and do not differentiate between buy volume and sell volume.

Most successful traders use the CVD indicator in conjunction with other indicators. This helps them analyze the state of the market and plan their trading strategy.

The CVD indicator was not designed to be used as a standalone indicator. It can give confirmation of a reversal in the crypto market when there is a large inflow or outflow of capital from an asset.


On-Balance Volume (OBV)

OBV Definition

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price.

Joseph Granville first developed the OBV metric in the 1963 book Granville’s New Key to Stock Market Profits.

Granville believed that volume was the key force behind markets and designed OBV to project when major moves in the markets would occur based on volume changes. In his book, he described the predictions generated by OBV as "a spring being wound tightly." He believed that when volume increases sharply without a significant change in the stock’s price, the price will eventually jump upward or fall downward.

OBV Illustration:
OBV Indicator

Important Points To Remember:

  • On-balance volume (OBV) is a technical indicator of momentum, using volume changes to make price predictions.
  • OBV shows crowd sentiment that can predict a bullish or bearish outcome.
  • Comparing relative action between price bars and OBV generates more actionable signals than the green or red volume histograms commonly found at the bottom of price charts.

OBV Calculation

On-balance volume provides a running total of an asset’s trading volume and indicates whether this volume is flowing in or out of a given security or currency pair. The OBV is a cumulative total of volume (positive and negative). There are three rules implemented when calculating the OBV. They are:

  1. If today’s closing price is higher than yesterday’s closing price, then: Current OBV = Previous OBV + today’s volume

  2. If today’s closing price is lower than yesterday’s closing price, then: Current OBV = Previous OBV – today’s volume

  3. If today’s closing price equals yesterday’s closing price, then: Current OBV = Previous OBV

Using The OBV

The theory behind OBV is based on the distinction between smart money – namely, institutional investors – and less sophisticated retail investors. As mutual funds and pension funds begin to buy into an issue that retail investors are selling, volume may increase even as the price remains relatively level. Eventually, volume drives the price upward. At that point, larger investors begin to sell, and smaller investors begin buying.

Despite being plotted on a price chart and measured numerically, the actual individual quantitative value of OBV is not relevant. The indicator itself is cumulative, while the time interval remains fixed by a dedicated starting point, meaning the real number value of OBV arbitrarily depends on the start date. Instead, traders and analysts look to the nature of OBV movements over time; the slope of the OBV line carries all of the weight of analysis.

Analysts look to volume numbers on the OBV to track large, institutional investors. They treat divergences between volume and price as a synonym of the relationship between "smart money" and the disparate masses, hoping to showcase opportunities for buying against incorrect prevailing trends. For example, institutional money may drive up the price of an asset, then sell after other investors jump on the bandwagon.

Limitations Of OBV

One limitation of OBV is that it is a leading indicator, meaning that it may produce predictions, but there is little it can say about what has actually happened in terms of the signals it produces. Because of this, it is prone to produce false signals. It can therefore be balanced by lagging indicators. Add a moving average line to the OBV to look for OBV line breakouts; you can confirm a breakout in the price if the OBV indicator makes a concurrent breakout.

Another note of caution in using the OBV is that a large spike in volume on a single day can throw off the indicator for quite a while. For instance, a surprise earnings announcement, being added or removed from an index, or massive institutional block trades can cause the indicator to spike or plummet, but the spike in volume may not be indicative of a trend.


Volume Weighted Average Price (VWAP)

VWAP Definition

The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of every new trading session.

It’s a trading benchmark that represents the average price a security has traded at throughout the day, based on both volume and price.

VWAP is important because it provides traders with pricing insight into both the trend and value of a security.

Note: There are also other variations of VWAP like the Anchored VWAP and the Rolling VWAP. Anchored VWAP is defined based on a custom range that the user defines while the VWAP is calculated using a moving window defined by a time period (not a simple number of bars), so it never resets like the traditional VWAP. This guide will only cover the traditional VWAP which is found in all trading platforms.

VWAP Illustration:
VWAP Indicator

Important Points To Remember:

  • The volume-weighted average price (VWAP) appears as a single line on intraday charts.
  • It looks similar to a moving average line, but smoother.
  • VWAP represents a view of price action throughout a single day’s trading session.
  • Retail and professional traders may use the VWAP to help them determine intraday price trends.
  • VWAP typically is most useful to short-term traders.

VWAP Calculation

VWAP is calculated by totaling the dollars traded for every transaction (price multiplied by the volume) and then dividing by the total shares traded.

/*
Typical Price = (High price + Low price + Closing Price) / 3
Cumulative = Total since the trading session opened.
*/
VWAP = Cumulative Typical Price * Volume / Cumulative Volume

Using The VWAP

VWAP is used in different ways by traders. Traders may use VWAP as a trend confirmation tool and build trading rules around it. For instance, they may consider stocks with prices below VWAP as undervalued and those with prices above it, overvalued. If prices below VWAP move above it, traders may go long the stock. If prices above VWAP move below it, they may sell their positions or initiate short positions.

Institutional buyers including mutual funds use VWAP to help move into or out of stocks with as small of a market impact as possible. Therefore, when they can, institutions will try to buy below the VWAP, or sell above it. This way their actions push the price back toward the average, instead of away from it.

VWAP’s incorporation of volume is valuable to traders for what it can indicate about the degree of trading activity during short periods of time — whether the competition is taking or exiting positions.

Limitations Of VWAP

VWAP is a single-day indicator and restarts at the open of each new trading day. Attempting to create an average VWAP over many days could distort it and result in an incorrect indicator.

While some institutions may prefer to buy when the price of a security is below the VWAP, or sell when it is above, VWAP is not the only factor to consider. In strong uptrends, the price may continue to move higher for many days without dropping below the VWAP at all or only occasionally. Therefore, waiting for the price to fall below VWAP could mean a missed opportunity if prices are rising quickly.

VWAP is based on historical values and does not inherently have predictive qualities or calculations. VWAP is anchored to the opening price range of the day. Therefore, the indicator increases its lag as the day goes on.


Money Flow Index (MFI)

MFI Definition

The Money Flow Index (MFI) is a technical oscillator that uses price and volume data for identifying overbought or oversold signals in an asset. It can also be used to spot divergences which warn of a trend change in price. The oscillator moves between 0 and 100.

Unlike conventional oscillators such as the Relative Strength Index (RSI), the Money Flow Index incorporates both price and volume data, as opposed to just price. For this reason, some analysts call MFI the volume-weighted RSI.

MFI Illustration:
MFI Indicator

Important Points To Remember:

  • The Money Flow Index (MFI) is a technical indicator that generates overbought or oversold signals using both prices and volume data.
  • An MFI reading above 80 is considered overbought and an MFI reading below 20 is considered oversold, although levels of 90 and 10 are also used as thresholds.
  • A divergence between the indicator and price is noteworthy. For example, if the indicator is rising while the price is falling or flat, the price could start rising.

MFI Calculation

/*
Typical Price = (High + Low + Close) / 3
Money Flow (MF) = Typical Price * Volume
MF Ratio = 14 Period Negative MF / 14 Period Positive MF
*/
MFI = 100 - (100 / (1 + MF Ratio))

When the price advances from one period to the next Raw Money Flow is positive and it is added to Positive Money Flow. When Raw Money Flow is negative because the price dropped that period, it is added to Negative Money Flow.

Using The MFI

One of the primary ways to use the Money Flow Index is when there is a divergence. A divergence is when the oscillator is moving in the opposite direction of price. This is a signal of a potential reversal in the prevailing price trend.

For example, a very high Money Flow Index that begins to fall below a reading of 80 while the underlying security continues to climb is a price reversal signal to the downside. Conversely, a very low MFI reading that climbs above a reading of 20 while the underlying security continues to sell off is a price reversal signal to the upside.

Traders also watch for larger divergences using multiple waves in the price and MFI. For example, a stock peaks at $10, pulls back to $8, and then rallies to $12. The price has made two successive highs, at $10 and $12. If MFI makes a lower higher when the price reaches $12, the indicator is not confirming the new high. This could foreshadow a decline in price.

The overbought and oversold levels are also used to signal possible trading opportunities. Moves below 10 and above 90 are rare. Traders watch for the MFI to move back above 10 to signal a long trade, and to drop below 90 to signal a short trade.

Other moves out of overbought or oversold territory can also be useful. For example, when an asset is in an uptrend, a drop below 20 (or even 30) and then a rally back above it could indicate a pullback is over and the price uptrend is resuming. The same goes for a downtrend. A short-term rally could push the MFI up to 70 or 80, but when it drops back below that could be the time to enter a short trade in preparation for another drop.

MFI vs. RSI

The MFI and RSI are very closely related. The main difference is that MFI incorporates volume, while the RSI does not.

Proponents of volume analysis believe it is a leading indicator. Therefore, they also believe that MFI will provide signals, and warn of possible reversals, in a more timely fashion than the RSI.

Overall, one indicator is not better than the other, they are simply incorporating different elements and will, therefore, provide signals at different times.

MFI vs. CMF

Created by Mark Chaikin, the Chaikin money flow (CMF) oscillator is similar to the more widely used Moving Average Convergence Divergence (MACD) indicator because it uses two different exponentially weighted moving averages (EMAs) to analyze momentum. MACD is generally calculated by subtracting the 26-period EMA from the 12-period EMA.

CMF Illustration:
CMF Indicator

Main Highlights:

  • Chaikin money flow oscillator and money flow index are both momentum indicators, but the similarities end there because the ways the indicators are calculated and interpreted are different.
  • Chaikin is similar to MACD in that both indicators use exponential moving averages in their calculations.
  • When the Chaikin money flow indicator is below zero, it suggests the market is in a downtrend and when it is above the zero level, the indicator suggests an uptrend.
  • Money flow index uses volume in combination with recent price movements to determine trends and to determine whether a market is overbought or oversold.

Limitations Of MFI

The MFI is capable of producing false signals. This is when the indicator does something that indicates a good trading opportunity is present, but then the price doesn’t move as expected resulting in a losing trade. A divergence may not result in a price reversal, for instance.

The indicator may also fail to warn of something important. For example, while a divergence may result in a price reversing some of the time, divergence won’t be present for all price reversals. Because of this, it is recommended that traders use other forms of analysis and risk control and not rely exclusively on one indicator.


Klinger Oscillator (KO)

Klinger Oscillator Definition

The Klinger Oscillator was developed by Stephen Klinger to determine the long-term trend of money flow while remaining sensitive enough to detect short-term fluctuations.

The indicator compares the volume flowing through securities with the security’s price movements and then converts the result into an oscillator. The Klinger oscillator shows the difference between two moving averages which are based on more than price. Traders watch for divergence on the indicator to signal potential price reversals. Like other oscillators, a signal line can be added to provide additional trade signals.

Traders will use tools such as trendlines, moving averages, and other indicators to confirm trade signals. In addition, traders may use the oscillator in conjunction with chart patterns, such as price channels or triangles, as a way to confirm a breakout or breakdown. Crossovers occur frequently, as do divergences, so the indicator is best used in conjunction with these other technical trading methods.

Klinger Oscillator Illustration:
Klinger Oscillator Indicator

Klinger Oscillator Calculation

The Klinger Oscillator is fairly complex to calculate and it is beyond the scope of this guide, but it’s based on the idea of force volume, which accounts for volume, trend (positive or negative), and temp (based on multiple inputs and if/then statements).

Using this data, the oscillator is created by looking at the difference between two exponential moving averages of force volume involving different time frames (typically 34 and 55).

//Klinger Oscillator Function In Pine Script v5
ko(ma_1_len, ma_2_len) =>
    var cumVol = 0.0
    cumVol += nz(volume)
    if barstate.islast and cumVol == 0
        runtime.error("No volume is provided by the data vendor.")
    sv = ta.change(hlc3) >= 0 ? volume : -volume
    ko_value = ta.ema(sv, ma_1_len) - ta.ema(sv, ma_2_len)

Understanding The Klinger Oscillator

The idea behind the KO is to show how the volume flowing through the securities is impacting its long-term and short-term price direction.

The Signal Line:

A signal line (13-period moving average) is used to trigger buy or sell signals. This technique is very similar to signals that are created with other indicators such as the moving average convergence divergence (MACD). While these are the basic signals generated by these indicators, it’s important to note that these techniques may generate a lot of trading signals that may not be as effective in sideways markets.

The Uptrend:

When an asset is in an overall uptrend—such as when it is above its 100-period moving average and the Klinger is above zero or moving above zero — traders could buy when the Klinger oscillator moves above the signal line from below.

Klinger noted that when a stock was in an uptrend, and then dropped to unusually low levels below zero, and then moved above its signal line, this was a favorable long position to take.

The Downtrend:

When an asset is in an overall downtrend, traders could sell or short-sell when the Klinger oscillator moves below the signal line from above.

Klinger noted this was especially noteworthy when the indicator had seen an uncharacteristic spike above zero.

The zero line is also used by some traders to mark the transition from an uptrend to downtrend, or vice versa. While such signals won’t always agree with price movements, a move above zero helps confirm a rising price, while a drop below zero helps confirm a falling price.

Klinger Oscillator and Divergence:

The Klinger oscillator also uses divergence to identify when the indicator’s inputs are not confirming the direction of the price move.

It’s a bullish signal when the value of the indicator is heading upward while the price of the security continues to fall.

It is a bearish signal when the price is rising but the indicator is falling. Divergence can be coupled with signal line crossovers to generate trades.

For example, if a bearish divergence forms, a sell or short-sell could be initiated the next time the Klinger crosses below the signal line.

Limitations Of Klinger Oscillator

Crossovers and divergences, the two main functions of the oscillator, are prone to providing many false signals.

Signal line crossovers are so frequent that it is hard to filter out which ones are worth trading and which ones aren’t. Zero line crossovers also have issues, as the indicator may criss-cross the zero line multiple times before moving in a sustained direction, or the indicator may fail to move with the price resulting in a missed trading opportunity.

Divergence can be useful, but often occurs too early, resulting in the trader missing a large chunk of the trend, or the divergence fails to result in a price reversal at all. Also, divergence is not present at all price reversals, so it is not a reliable tool for spotting all possible price reversals.

Use the Klinger oscillator only in conjunction with other technical indicators or price action analysis.