Volume By Price Indicators – Why Traders Should Know These Technical Analysis Tools

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Volume is a critical factor to consider alongside price when analyzing charts for trading opportunities. Volume based indicators help traders gain valuable insights into price trends based on underlying buying and selling activity.

In this post, we’ll explore some of the most helpful volume indicators and how to use them to identify high probability trades. Understanding volume can give you an added edge in your technical analysis.

Introduction to Volume Indicators

A stock’s volume is the total number of shares traded during a day. Heavy volume days indicate high interest and wide participation in price movement. Light volume suggests minimal interest and conviction behind price trends.

Some key benefits of utilizing volume indicators in technical analysis:

Confirm price breakouts and identify true trend direction.
Gauge buying/selling pressure and participation behind price movements.
Spot divergences between volume and price for potential reversals.
Identify potential support and resistance zones based on volume activity.
Analyze cumulative buying/selling over extended periods using indicators like OBV.

Let’s look at some of the most useful types of volume indicators and how to apply them.

Volume by Price Indicator

The volume by price indicator displays at what specific price levels volume traded during previous periods. It creates horizontal volume bars across the price axis.

Taller volume bars identify potential support or resistance as a high number of shares transacted at those prices. Lower bars denote little trading activity.

Here is an example volume by price chart:

Volume by price provides a visual perspective on high volume price areas that are more likely to act as support and resistance. Watch for breakouts on heavy volume through previous bars.

Volume Profile Indicator

Volume profile works similarly to volume by price but rather than horizontal bars, it creates a vertical histogram painting volume directly into price levels on the right y-axis using color shading.

Areas showing high volume activity on the volume profile act as support and resistance zones with the price levels most participants have transacted at historically.

Here is an example volume profile:

Volume profile builds on volume by price with a visual shading of how volume is distributed across price levels rather than isolating each bar.

On-Balance Volume (OBV)

On-balance volume analyzes cumulative volume flow to identify when buyers or sellers are in control. OBV tracks volume as a simple momentum oscillator.

OBV adds volume on up days and subtracts volume on down days. Rising OBV shows bullish volume momentum aligned with price. Falling OBV indicates bearish volume sentiment despite upward price moves.

Here is an example of analyzing OBV divergences:

When OBV diverges from price, it signals that volume is not confirming the price move which hints a reversal may be brewing.

Volume Weighted Average Price (VWAP)

The volume weighted average price shows the average price at which an asset has traded based on both price and volume. VWAP places greater weight on periods with heavier trading activity.

VWAP acts as a reference for the average price weighted by volume so traders can compare current price to the VWAP to see if volume is supporting a move higher or lower.

Here is an example of VWAP on a chart:

In general, it’s bullish when price trades above VWAP signaling increased relative buying volume. Trading below VWAP reflects bearish selling pressure exceeding buying demand.

Using Volume in Your Trading Strategy

Here are some tips for incorporating analysis of volume indicators into your trading:

Add a transparent volume histogram below or behind price bars to see high volume surges or lack of conviction.
Identify potential support or resistance levels using volume profiles and volume by price markers.
Look for divergences between OBV and price such as OBV stalling as price rises.
If price is above VWAP, remain bullish. If price falls below VWAP, exercise caution on long trades.
Trade pullbacks to high volume areas, especially on heavy volume for breakout confirmation.
Be wary of price rises on low, declining volume as it signals weakening momentum.

Make analyzing volume a consistent part of your trade preparation routine using indicators like OBV, VWAP, volume histograms, and volume by price. The added context can confirm high probability trades.

Frequently asked questions

Q: What are volume by price indicators?

A: Volume by price indicators are tools used in technical analysis to analyze the relationship between price and volume data. They help traders to understand the distribution of trading volume at different price levels on a stock chart.

Q: How do volume by price indicators work?

A: Volume by price indicators divide the price range into multiple segments and calculate the cumulative volume for each segment. These indicators help traders identify areas of support and resistance, as well as determine the strength of price change.

Q: Why should traders know volume by price indicators?

A: Traders should know volume by price indicators because they provide valuable insights into the trading activity at different price levels. This information can help traders make better-informed decisions about when to buy or sell a stock.

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Q: What is the significance of volume in technical analysis?

A: Volume is an important indicator in technical analysis as it provides insights into the strength of price movements. High volume often indicates that a price trend is likely to continue, while low volume suggests a lack of interest or uncertainty in the market.

Q: How can volume by price indicators help in identifying trends?

A: Volume by price indicators can help in identifying trends by analyzing the volume data at different price levels. If there is a high volume at certain price levels during an upward trend, it indicates strong buying interest and suggests that the trend is likely to continue.

Q: Are volume by price indicators the best volume indicators?

A: Volume by price indicators are one of the best volume indicators for analyzing the distribution of trading volume at different price levels. However, there are other volume indicators available that focus on different aspects of volume analysis.

Q: Can volume by price indicators be used for day trading?

A: Yes, volume by price indicators can be used for day trading. They provide valuable information about the trading activity at different price levels, which can help day traders identify potential areas of support and resistance.

Q: How can volume by price indicators be incorporated into trading strategies?

A: Volume by price indicators can be incorporated into trading strategies by using them to confirm price trends or identify potential reversal points. Traders can look for high volume areas as confirmation of an upward trend or as potential resistance levels.

Q: Are volume by price indicators only used in technical analysis?

A: Yes, volume by price indicators are primarily used in technical analysis to analyze the relationship between price and volume data. They are not typically used in fundamental analysis, which focuses on company financials and industry trends.

Q: Can you provide an example of a volume by price indicator?

A: Sure! An example of a volume by price indicator is the volume profile chart. This chart displays the volume traded at specific price levels, allowing traders to see where the most trading activity has occurred.

Bottom Line

Here are some key points all traders should know regarding utilizing volume indicators:

Volume adds valuable confirmation of the strength of price movements.
Indicators like OBV, VWAP, and volume by price paint the volume picture.
Watch for volume divergences signaling potential price reversals.
High volume areas tend to act as future support and resistance upon retests.
Increased bullish volume signals strong upside momentum and vice versa for bearish volume.
Use volume to confirm price movements, not trade solely based on volume.

Volume should not be analyzed in isolation but rather alongside price action. When aligned, high bullish volume and rising prices confirm a strong uptrend for example. By incorporating volume analysis into your trading process, you can gain an added edge for higher probability trades.