Most technical analysts in financial markets use multidimensional methods to analyze the market by following the two factors of price and trading volume. Capital market chartists simply plot the volume of trades by price. But what is trading volume and what is its application in trading? The answer to this question is given in this article.
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Trading volume as a secondary indicator
The volume of transactions is the amount of transactions made in a period of time. We first examine the volume of daily transactions. The daily trading volume is plotted with vertical lines at the bottom of the daily price chart.
Trading volume can also be drawn on a weekly basis. This total is drawn for one week below the weekly price chart. Monthly volume is rarely used.
Interpretation of trading volume in all financial markets
The volume of trades indicates the intensity or urgency hidden in the price movement. Heavier trading volume indicates more willingness or pressure. By reviewing the level of trades along with price movements, analysts can measure the willingness or pressure to buy or sell in a better market movement. This information can then not be used to confirm price movement or to warn that price movement is uncertain.
The summary of this law is as follows: the volume of transactions must be increased or expanded in the direction of the current price trend. In an uptrend, the trading volume should increase or expand in the direction of the current price trend.
In the uptrend, the trading volume should increase at the same time as the price rises, and should decrease when voids appear. As long as the pattern continues, trading volume should confirm the price trend.
Analysts are also looking for signs of divergence. Divergence occurs when the uptrend above a high point in an uptrend is accompanied by a decrease in trading volume. This situation is a warning to traders about reducing the buying pressure. If trading volume tends to increase in the loopholes, analysts are concerned that the uptrend will be hampered.
Trading volume as a confirming factor in price patterns
One of the symptoms of ceiling head and shoulders is when the volume of trades in each uptrend decreases compared to the previous uptrend and the volume of trades in the right shoulder is less than the left shoulder. In the twin and triple ceiling patterns, the trading volume in each uptrend to reach the ceiling is associated with a lighter trading volume than the previous wave.
Continuing patterns such as triangles should be accompanied by a gradual decline in trading volume. As a general rule in all failure points, if the failure warning is real, we should see heavy trading volume.
Balanced volume indicator or OBV
Analysts use a variety of indicators to help determine buying or selling pressure. The simplest and most famous of these indicators is Balanced Volume, or OBV, introduced by Joseph Granville in his 1963 book. This line is used to confirm the quality of the current trend or alert when returning or to indicate divergence with the trend.
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