Volume Based Trading Techniques (Volume Indicators)

Volume Based Trading Techniques (Volume Indicators)

Investors accuse most potential technical indicators.

Because data is unstable.

Demand and supply force the market.

Learn how traded volume plays a crucial role in forecasting price action.

Saqib Iqbal 434 Updated:


Let’s start from the basics.

What is Volume in the stock market?

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.

Trading platforms have a volume indicator below the price chart (a bar chart).

These bars are color-coded to correspond to the current price action in a specific timeframe.

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.

The height of the bar shares the volume by increasing or decreasing.

The volume

Further reading

The Dow Theory: The Role of Volume

The Dow Theory: The Role of Volume

The volume confirms the respective trend.

If the volume increases, this ensures an upward trend with rising prices.

On the other hand, the theory 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

Volume Indicators

Here are the top volume indicators for stock trading:

  1. On Balance Volume (OBV) Indicator 

This indicator also reacts to changes in price and volume.

Let’s unhide 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 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.

  1. How to Trade the On Balance Volume (OBV) Indicator? 

This indicator works such that the changes are first visible in the OBV before they reflect the rising or falling 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 the 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 (VPT)

The VPT (Volume-Price Trend) is a momentum oscillator that considers the trading volume of the given stock.

Steve L. Kille is a US 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 of 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 to the positive territory, the trend is still steady.

However, if it drops from the positive environment, then the trend is weakening.

If the VPT indicator continues to slide down in 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 (ADL), developed by Mark Chaikin.

The purpose of this indicator is to improve the theories advanced by the OBV.

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 basis of ADL’s theoretical concept is that the well-founded trend movements always accompany the increasing volumes, i.e., by the market’s increasing interest.

If this parallelism 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.

Further reading

How to Trade the ADL Indicator?

How to Trade the ADL Indicator?

The ADL aims to represent the flow of liquidity that flows 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 disconnect 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, UDV for short, is based on the basic 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 insight 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 vital.

Similarly, if the UDV indicator is negative and the price is an uptrend, the movement is regarded as weak.

Conversely, if the UDV indicator is negative and the price is bearish, consider that trend vital.

Furthermore, if the UDV indicator is in positive territory and the price is bearish, the movement is regarded as weak.

  1. Chaikin Oscillator

The Chaikin Oscillator (ChO) is a further development of the Accumulation Distribution Line (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 under low volume are less noticed than price movements under high volume.

Therefore, helping us in identifying the strengths and weaknesses in 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 more it is away from the centerline, the larger it is.

Essentially, the ChO measures the accumulation-distribution line of moving average convergence-divergence (MACD).

The indicator’s intention is to make the changes in the momentum of the accumulation – distribution – line visible at an early stage and present them in two types of signals.

In principle, this is a MACD indicator based on the ADL.

For this reason, we can use ChO in the same methods as with MACD.

How to Trade with the Chaikin Oscillator?

We recommend observing the trading signals that are only in the trend direction while using the ChO.

Meaning, only consider buy signals in an uptrend and only the 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 sub-chart.

As a rule, a steady upward trend occurs when rising prices accompany the increasing volume.

The same applies to downward trends.

In consolidation phases, the volume traded is usually lower.

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We hope you find this article helpful and informative.

Let us know in case of any questions or queries in the comments below.

All the best!

Further reading