How to analyze the Trading Volume indicator correctly

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How to analyze the Trading Volume indicator correctly
How to analyze the Trading Volume indicator correctly

There are many pitfalls in the Forex market that cause traders to lose a lot of money. The most common are Bear Trap and Bull Trap, which makes traders go from expecting the price to break out to a state of disappointment. To avoid this situation, large funds and professional investors will focus on analyzing the trading volume when the price starts to reach a special level.

Here we use Volume as a technical indicator to analyze it. Based on that, we will see the reasonableness and abnormalities in the relationship between price and trading volume to have beautiful entry points. In this article, I’m going to dive into volume analysis so you don’t fall into the traps of the market.

Confirmation of trading volume

You want to know whether a price action represents a successful breakout or not? It’s very simple. The confirmation of the volume will help you do that. Let’s look at the following example to make it easier to understand.

The price is confirmed by trading volume
The price is confirmed by trading volume

We see a candle with a large body and confirmed by high volume. Thereby, we conclude that the price action is confirmed by volume. This is a reliable action with a high probability that the trend will continue in the future. It is a phenomenon that I call “great effort for great results”. So we can rely on that to find a nice, fast and safe entry point.

The price is confirmed by trading volume
The price is confirmed by trading volume

Above is a candle with a short and small body and low volume. This is very logical. It represents the disinterest of investors. That lack of interest can only take the price a short distance.

So, if it were a sequence of candles, what would it look like?

Example 1: A series of Bullish candlesticks combined with increasing volume

A series of Bullish candlestick combined with increasing volume
A series of Bullish candlestick combined with increasing volume

Example 2: Bearish candlestick cluster combined with increasing volume

Bearish candlestick cluster combined with increasing volume
Bearish candlestick cluster combined with increasing volume

The two examples above represent the consensus between price and volume. As volume increases, it confirms investor strength and interest, which shows through strong bullish and bearish candlesticks representing the trend of the price.

When the market is bullish, the interest of traders (increasing volume) pushes the price to new highs.

When the market is bearish, the interest of traders (increasing volume) represents the need to sell, which leads to a sharp drop in prices.

Abnormalities when analyzing trading volume

Contrary to confirmation, abnormalities indicate non-homogeneous relationships between price and volume. In this case, the unusual signals of price trend and volume will make it easy for traders to lose money when entering orders. So staying out will be the best way to protect your pocket.

The price increases but the volume is down
The price increases but the volume is down

In the image above, we can see a price growth with a large real body candle. However, trading volume is below average. That shows an anomaly in those rallies. It can lead to a reversal, lack of reliability or be a false signal. To me, this is called “small effort, big results” – an anomaly.

The price drops but trading volume increases
The price drops but trading volume increases

In this case, this could be a better-than-usual signal as we see a breakout in volume (with a lot of attention from investors) but the price doesn’t move up much. This could be a sign of “collection” of the big hands.

However, that is in case the price is at the bottom of the downtrend. If this sign appears in an uptrend, we must again be careful about the reversal. This price action and volume I will call “big effort, small Results”.

Meaning in an uptrend or downtrend when trading volume is down

The decline in volume during a trend gives traders a lot to think about. The decrease in trading volume in an uptrend shows the lack of interest of investors and the price may reverse in the nearest time.

Meaning when the price increases but the volume decreases
Meaning when the price increases but the volume decreases

On the contrary, so is the decrease in volume during a downtrend. However, volume in this case seems to play a small part. Investors’ lack of interest in a downtrend could lead to further price declines in the future. In cases like these, we should use them as a warning signal to close profitable positions.

Meaning when the price falls and volume drops
Meaning when the price falls and volume drops

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How to analyze the Trading Volume indicator correctly
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