Volume Analysis Techniques
Volume analysis is a key aspect of technical analysis that involves the examination of the number of shares or contracts traded in a security or an entire market during a given period. It is an important tool for traders and investors to understand the relationship between volume and price movements, and to predict future market trends. In this article, we will discuss some of the most popular volume analysis techniques.
On Balance Volume (OBV)
On Balance Volume (OBV) is a momentum indicator that uses volume flow to predict changes in stock price. Joseph Granville developed the OBV metric in the 1960s. He believed that when volume increases sharply without a significant change in the stock’s price, the price will eventually jump upward, and vice versa.
How to Use OBV
To use OBV, start by assigning a value of zero to a chosen starting point on the chart. If the closing price of the security is higher than the previous day’s closing price, then the volume of that day is added to the previous OBV. If the closing price is lower, the volume is subtracted. The resulting figure is the OBV.
Interpreting OBV
If the OBV is rising, it shows that buyers are willing to step in and purchase the stock, indicating buying pressure. Conversely, a falling OBV reflects negative volume pressure, which can indicate the start of a downward trend in price.
Volume-Weighted Average Price (VWAP)
The Volume-Weighted Average Price (VWAP) is a trading benchmark used by traders that gives the average price a security has traded at throughout the day, based on both volume and price. It is important because it provides traders with insight into both the trend and value of a security.
How to Use VWAP
To calculate VWAP, the dollar amount traded for every transaction (price x shares traded) is added and then divided by the total shares traded for the day.
Interpreting VWAP
Traders use VWAP to determine the market direction and filter trading signals. If the price is below the VWAP line, the trend is down, and if the price is above the VWAP, the trend is up.
Volume Rate of Change (VROC)
The Volume Rate of Change (VROC) is an oscillator that measures the rate of change in volume. It is used to identify new trends or to confirm existing trends.
How to Use VROC
To calculate VROC, you subtract the volume x days ago from the current volume and then divide by the volume x days ago.
Interpreting VROC
If the VROC is rising, it indicates an increase in buying pressure, which could lead to an upward price break. Conversely, if the VROC is falling, it indicates an increase in selling pressure, which could lead to a downward price break.
Conclusion
Volume analysis is an essential part of technical analysis that can help traders and investors make informed decisions. By understanding and using volume analysis techniques like OBV, VWAP, and VROC, you can gain a deeper understanding of market trends and make more accurate predictions about future price movements.