Volume Analysis Techniques
Volume analysis is a fundamental strategy used by traders and investors to understand the behavior of financial markets. It involves the study of the number of shares or contracts traded in a security or a market during a given period. Volume analysis is often used in conjunction with price analysis to validate trends and market direction. In this article, we will explore several volume analysis techniques that traders use to make informed decisions.
1. Volume Price Trend (VPT)
Volume Price Trend, or VPT, is a technical analysis indicator that combines price and volume to assess the force behind a market move. The aim is to identify increasing volume when the price of an asset moves in a certain direction, as this is often a sign of increasing momentum and a potential continuation of the trend.
How to Use VPT
To use VPT, you need to add or subtract a multiple of the percentage change in share price trend and current volume, depending upon the movement of the price. The result is added to the previous VPT value. A rising VPT suggests a rise in price, while a falling VPT suggests a decline in price.
2. On-Balance Volume (OBV)
On-Balance Volume, or 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”.
How to Use OBV
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 volume alone. To use OBV, start with a total volume number, add the current day’s volume if the closing price is higher than the prior day’s close and subtract the current day’s volume if the closing price is lower than the prior day’s close.
3. Klinger Volume Oscillator (KVO)
The Klinger Volume Oscillator (KVO) is a volume-based indicator that highlights long-term trends. It was developed by Stephen J. Klinger and it combines prices and volumes to form a volume force. A positive volume force indicates accumulation, while a negative volume force indicates distribution.
How to Use KVO
The KVO is calculated by first creating a volume force, which is based on the trend of both the volume and the price. The volume force is then smoothed with two exponential moving averages (EMAs), and the longer EMA is subtracted from the shorter one to create the KVO. The KVO is then plotted against a trigger line, which is the EMA of the KVO.
Conclusion
Volume analysis is a key part of understanding market trends and making informed trading decisions. By combining volume analysis with other forms of technical analysis, traders can create a more comprehensive view of the market and increase their chances of success. The Volume Price Trend, On-Balance Volume, and Klinger Volume Oscillator are just a few of the volume analysis techniques that traders can use to analyze market behavior.
