Volume Indicators for Stock Trading

Trading volume is an essential parameter for technical research as it helps traders confirm or refute price signals. When a huge number of shares are being traded, it indicates a strong price movement in the future. That is why most traders use volume indicators along with other metrics to reveal upcoming changes in the market and understand the strength behind such movements.

This blog will take you through important volume indicators used in the stock market. Keep reading till the end to know all about volume indicators.

What is volume in the stock Market and its importance?

Trading volume is the total number of stocks that are traded for any security. In simple terms, these are the total number of securities that all investors have bought or sold over a given period. Volume is one of the major indicators that allow experts to determine a security’s liquidity over a given period of time. 

Volume indicators are used to determine liquidity in stocks, futures, bonds and options. Volume indicator charts can be analysed on an hourly, monthly, daily, weekly or yearly basis. 

What are the common volume indicators?

• On Balance Volume (OBV)

This is a simple volume indicator that assists in predicting stock prices with changes in the market. On Balance Volume was developed by Joe Granville and was the first indicator to measure both positive and negative volume flows. This indicator considers that there is a correlation between the price and volume of any stock. 

The OBV indicator studies the cumulative buying and selling pressures of stocks. Volumes on up days are added, while volumes on down days are subtracted to form a cumulative value. 

If the closing price of a stock is higher than yesterday’s price, then the day’s volume  will be added to the previous day OBV balance. When the closing price on a day is lower than the previous day’s closing price, the volume is deducted. However, if the closing prices on two days are equal, then you must not add or subtract the day’s volume. 

Traders use this metric to confirm price trends and look for signs of a continuation or reversal of trends. The price of a stock and the direction of its OBV help to confirm upward and downward trends. 

• Klinger Oscillator

Developed by Stephen Klinger in 1977, the Klinger Oscillator takes the differences between two exponential moving averages (EMA). This is a little more complicated indicator than OBV as it helps in predicting both short-term and long-term trends and reversals.

The Klinger Oscillator analyses the EMA of both volume and prices of stocks and converts the end result into an oscillator. When a shorter time period or shorter EMA has a greater value than a longer time span or longer EMA, the market is believed to be rising. 

On the other hand, when a longer EMA tends to hold a higher value than a shorter EMA, traders believe that the market is moving downtrend. This indicator helps with analysing long term capital flow trends of certain security while being sensitive enough to measure short-term fluctuations.

• Chaikin Money Flow

Marc Chaikin developed the Chaikin Money Flow (CMF) indicator to combine price and volume into one indicator. It measures the volume-weighted average of accumulation and distribution over a standard period of 21 days. This indicator helps to analyse the dominating buying and selling pressures in the market.

According to this indicator, if the closing price of a stock is near its high, then buying pressure is dominating the market. On the other hand, if the previous day’s closing price is near its low, then selling pressures will dominate.

A CMF value above the zero line is a sign of strength in the market. Whereas, a negative CMF or below zero line is a sign of weak market sentiments.

What are negative and positive volume indices?

Financial experts use the negative volume index (NVI) and positive volume index (PVI) as technical indicators for volume analysis. A decrease in trading volume is measured with the negative volume index. This index keeps a track of the volume of assets to analyse the role of smart money flowing into it. 

If smart money gets invested in an asset, its price movements will be backed by important facts and fundamentals. Without smart money, investors consider that emotions and other market events drive the prices of assets.

The negative volume index always starts from 1,000. In case there is a decrease in volume of assets, consider adding the percentage of price variation of the asset to determine its final negative volume index.

On the contrary, a positive volume index is used to measure positive changes or increases in trading volume for a certain period. To determine any increase, today’s trading volume is compared to that of yesterday. If financial experts find any increase in current trading volume, positive trading volume is adjusted. Furthermore, if trading value remains the same for a given year, its positive volume index will not change.

According to this indicator, when PVI is high, the crowd following ″uninformed” investors will enter the market. The PVI is calculated against a moving average of 255 days on a weekly, monthly or quarterly basis.

Formula to Calculate Negative Volume Index

As you get to know what a negative volume index is, let’s take a look at the formula to calculate the same.

Negative Volume Index (NVI) = NVI of previous day + ((today’s CP-yesterday’s CP)/CP yesterday)*NVI previous

Here,

• NVI’s previous= negative volume index of the previous day
• CP yesterday= closing price of yesterday
• CP today= closing price of today

Formula to Calculate Positive Volume Index

Here is the formula to determine the positive volume index of a trading day. 

Positive Volume Index (PVI) = PVI previous + ((today’s CP-yesterday’s CP)/CP yesterday)* PVI previous. 

Here, 

• PVI= Positive Volume Index
• PVI previous = positive volume index of the previous trading day. 
• Today’s CP = closing price of stocks today
• Yesterday’s CP= closing price of stocks yesterday

Final Words

Volume indicators are one of the main tools used for technical analysis of stocks. It is important to note that by analysing the market pattern with these volume indicators and price movements, traders can make more accurate predictions of market trends and formulate trading strategies. However, if you are new to these tools, consider taking the help of financial experts before investing. 

Frequently Asked Questions