Volume Price Analysis

Volume Price Analysis Indicator Explained

9 min read

Investors and traders alike rely heavily on indicators to guide their trading decisions. But how does one choose from the 100’s of indicators and strategies available? Is one better than another? What about volume price analysis?

What if I told you one of the most underrated and overlooked strategies is also one of the most powerful? That, my friend, is volume price analysis, and it’s incredibly simple. However, if you can see beyond its simplistic nature, you’ll discover that this trading technique is incredibly valuable!

Let’s start with a quick crash course on the market, supply, and demandUnderstanding the imbalance between supply and demand can be a fundamental factor in better trading decisions. When market conditions are entirely normal, supply and demand have the most significant impact on commodities. If more of a good is needed and the supply dwindles, the price will invariably increase. The opposite is true; prices decrease when supplies are high but demand is low. 

This is true for the financial market as well. If you trade in the foreign exchange market, any increased demand for dollars will cause the dollar‘s price to rise to the value of other currencies.

What volume price analysis does is it allows you to look deeply into market structure and grasp processes that move a price. With that information, you can guide your trading decisions.

Experts have discovered that people who make informed trading decisions that include a thorough review of price volume tend to be more successful than traders who do not analyze this indicator.

Volume Price Analysis Accumulation

Volume Predicts the Future (Sort Of)

If we all had crystal balls that predicted market moves, we’d all be millionaires. Volume is the next best thing to a crystal ball.

Beyond determining whether a market is bearish or bullish, it tells you what traders will do in the minutes, hours, and days ahead. 

With great information, you can make timely and strategic trading decisions that help you come out as a winner. More importantly, there may be developments, actions, or activities on the part of companies that have triggered significant moves in volume.

This indicator gives you a heads-up that there is more research to do. You could say if you were looking for stock market jobs, volume price analysis could be helpful.

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Accumulation & Distribution

Like most things in life, the structure of the commodity market is cyclical. We can break the cycle into two distinct phases, alternately passing through each other:

  • Accumulation phase (balance)
  • Distribution phase (imbalance)

A struggle between buyers and sellers characterizes the Accumulation phase. Traders enter positions that eventually turn the “balance” state into an “imbalance.”

At this point, one side begins to dominate, either buyers or sellers, i.e., a bull vs bear market. Volume price analysis can help determine that.

It’s worthwhile to note that this process is spontaneous and varies in duration. Ultimately, the result is always the same: a transition to the distribution stage.

Volume Price Analysis Example

Volume Price Analysis Accumulation

Once the balance scales are tipped, we enter the Distribution phase. A telltale characteristic of this phase is a rapid price change. At this point, buyers or sellers strongly dominate the market, increasing prices.

Eventually, we cycle back into the accumulation phase as buyers and sellers search for a fair price again.

However, the distribution stage only sometimes stems from the accumulation stage. A classic scenario is the release of some fundamental catalysts like economic or financial news that impact trading decisions.

Not surprisingly, news like interest rate changes, earnings releases, and new product announcements all impact traders’ decisions. And we see this impact as an imbalance in the market.

A rising A/D line helps confirm a rising price trend. A falling A/D line helps confirm a price downtrend..”

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How Do You Read Volume Price Analysis?

The A/D is considered strong if a wide range exists between an asset’s price at market open and market close. Traders, however, should also consider the patterns made by the highs and lows of the A/D indicator. Rather than movements reflecting individual assets, currencies, or commodities, they can also indicate a low, upward-trending market in general. It’s important to note that there are times when asset volumes rise ahead of any sharp sell-offs, which can create a strong diversion. When this is the case, volume indicators, like volume price analysis, will need to be used along with other signals, such as fundamental and technical indicators. 

On-Balance-Volume Indicator

Developed by Joseph Granville in 1963, the on-balance volume (OBV) indicator is a technical trading momentum indicator.

OBV uses the previous day’s price movement to predict stock price. The indicator will move, whether higher or lower, long before the prices start moving.

You can make educated decisions in today’s trading decisions by looking at whether prices rose or fell. 

In this strategy, you can find a buying opportunity via a new high that indicates a bullish market rather than a bearish one. An on-balance volume that’s lower will indicate a bear market.

Furthermore, shifts in divergence or price can be identified when the on-balance volume signal is different from an asset’s actual market price.

Why Is Volume Important?

There are two primary reasons why volume is so incredibly important. To start, it offers a window into the minds and hearts of other traders.

It’s excellent for identifying fear that might incite rapid sell-offs and significant price changes. Likewise, paying attention to this factor is the easiest and most effective way to identify trends.

This number reflects the total sum and value of every transaction at a specific time. The volume indicator will always perfectly reflect the price. 

If you’ve been using candlestick charts, you’ll find this tool infinitely easier to leverage. If you want to learn how to read candlestick charts but have yet to have nominal success, using this indicator is a far better choice.

You’ll have a clearer understanding of what you are looking at and a much easier time interpreting the data and putting your idea into action.

What Is a Good Trading Volume?

Volume is a great trading tool. Therefore, volume price analysis is a great technical indicator. Twenty million in volume is a good general rule of thumb. The more volume, the more liquidity. The more liquidity, the better your entries and exits fill.

Various chart patterns can be confirmed by volume as well. These include head and shoulder patterns, flags, and triangles.

Most seasoned traders use volume when attempting to make these confirmations. When volume is high, the formation of chart patterns is easy to identify and confirm. 

Volume Price Analysis Reflects Price

This number reflects the total sum and value of every transaction at a specific time. The volume indicator will always perfectly reflect the price. 

If you’ve been using candlestick charts, you’ll find this tool infinitely easier to leverage. If you want to learn how to read candlestick charts but have yet to have nominal success, using this indicator is a far better choice.

You’ll have a clearer understanding of what you are looking at and a much easier time interpreting the data and putting your idea into action.

Volume verifies trends. When asset prices rise with a large volume, a trend is strong. To put it plainly, this is a bullish signal.

Conversely, if high volume and the asset price drops, you know that people are selling their stocks. In other words, it can inform your movements so that you can mitigate your losses by taking timely action.

Final Thoughts on Volume Price Analysis

Volume remains one of the most important and valuable psychological indicators available. It allows traders to see when others are anxious and fearful and, above all, ready to sell off.

It additionally helps people spot possible price hikes due to bullish trading. This tool is especially important for day traders requiring comprehensive, real-time information.

Frequently Asked Questions

The important factor when using volume price analysis is that a catalyst usually triggers large spikes in volume. This could be news, a press release, or economic even.

Volume by price is often used to map support and resistance levels. Large spikes in volume could signify strong buying or selling interest.

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