Volume indicators. How do they work?
Hello, traders! Today, I would like to talk about indicators and how you can utilize it in your trading journey.
On Balance Volume
The indicator is calculated cumulatively – the current value is determined as the sum of volumes over previous and current periods of the price chart. The sign is taken into account during summation: if the price increases during the period, the volume receives a positive value; if it decreased, the volume receives a negative value.
As a result, traders obtain a tool that reflects the accumulation of long positions (indicator rises) or short positions (indicator falls) in trading. The indicator generates signals that anticipate movements in relation to the price chart. Its significant movements effectively confirm trends in quotes, and divergences with price charts provide signals with a high degree of reliability.
Important note: This indicator is practically indispensable during flat market conditions – its growth or decline under these circumstances reveals market intentions, enabling precise determination of breakout from sideways movement and the direction of an impulse.
How make to use of this?
Utilize divergences as an additional framework indicating potential shifts in the current price trend.
Accumulation/Distribution
Developed by Larry Williams, this indicator suggests modifying the calculation of the On Balance Volume to account for the contribution of bulls and bears in each period. This involves considering the price movement during the period from opening to the maximum, minimum, and closing prices. As a result, a more precise tool for assessing position accumulation is created, while maintaining the same integral (filtering) properties.
It's used in trading just like the On Balance Volume but generates quicker signals. On prolonged trends, the indications of these two indicators exhibit minimal differences. However, during corrections and flat market conditions, the Accumulation/Distribution indicator appears to be preferable.
The Money Flow Index (MFI)
The Money Flow Index (MFI) proves quite useful for traders familiar with the crypto scene. It serves as a volume-based indicator to assess whether the current temperature is running excessively hot or cold. Operating on such numbers of 0 to 100, the MFI closely resembles the (RSI). It also contains the data volume.
When MFI readings surge above 80, it could signal an imminent price reversal, driven by a significant surge in buying activity. On the other hand, when it reaches 20 or even drops below it, we might be witnessing an abundance of selling pressure, potentially indicating oversold conditions.
The true allure of the MFI lies in its ability to see divergences – a skill highly appreciated by traders. Divergence depends on the situation when the MFI decides to waltz to a different tune than the actual price movement, providing a potential heads-up for an impending trend reversal.
Consider this scenario: Picture a cryptocurrency's price steadily climbing higher, while the MFI, descending from the point of 80 or above, tells a contradictory tale. This wink from the indicator suggests that the price might be gearing up for a reversal performance. Conversely, envision the MFI making an upward turn from the depths of, let's say, below 20, even as the price continues its downward journey. This cunningly indicates a possible upward reversal looming on the horizon – truly a game of market whispers.
P/S: Every indicator has the right to thrive in the market, especially in algo trading while you create a network of robots. Among the options I'm fond of in the current market, on the Bitsgap platform, one can set up to take profits based on indicators. Currently, there are two choices: MACD+RSI. Hopefully, they'll introduce volume indicators over time.
I'd be delighted to hear about your strategies and experiences with these indicators.
Wishing you successful trades, traders!
