Volume and PA the combination of success Part II Examples and Indicators

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Volume and PA the combination of success Part II: Examples and Indicators

Good Day Traders,

In this article I am going to continue with the volume and price action combination with some good examples and some explanation about volume indicators and the volume indicator which I use.

First of all, I use a VSA indicator for reading the volume. It’s not like the classic volume indicator in your platform. Particularly, I use the better volume indicator and it’s the most accurate and easy way for reading volumes, at least for me. So, let’s go.

If you remember, in the previous article I talked about buying and selling climax. Let’s see the first screen shot of the day. It’s from EURUSD currency pair.

As you can see in the chart there are some colors in volumes. The white color means selling climax. The red color means buying climax. The yellow color means low volume and last but not least the green color means that there is a small movement with high volume. Look at the first blue box. The yellow horizontal lines are whole numbers which they act many times as natural support and resistance levels. In the first blue box you can see that we have an increasing volume and there are two selling climax white bars. The price is moving down with solid negative candles. This means that the investors are selling heavily. But look the price hit a whole number (our support in this case). After the selling climax the investors realize that the price is in a very low level and it’s oversold, as I said in my previous article. After the two white bars it appears a red bar which is a buying climax. This is a good signal that the mini-down trend is at the end. The two white bars, the red bar after them and the whole number as a support are our signals for buying the asset right now. Look, it begins a new up- trend.

In the second blue box, you can see that we have again a selling climax but the price stop moving down and makes a reversal. This is our Price Action Signal. We have higher- lows a signal of an up- trend. We can re- enter with a call in this spot.

In this chart we have a different case. The red horizontal line is a previous resistance and a whole number, too. We have an up trend and after that as you can see in the blue box a consolidation period with low volume near to the resistance. Notice that when the price hit the resistance it appears a big white bar which is a selling volume. This is a signal that maybe it’s the end for the up- trend. Finally this is true and in next 45 minutes and more the price is moving down.

There are many ways to read the volume. Choose the indicator you like and looking for climax bars near S&R. When you have a clear confirmation of the new move of the market it’s time to trade. I recommend longer expiry.

Volume and PA the combination of success Part I: “climax”

Good Day Traders,

In this article I am going to make an introduction to the combination of volume and price action. Many traders ignore the changes in volume while they trading maybe because they don’t know its worth or maybe it’s a little bit difficult to understand it. I believe that a combination of the volume and price action maybe with an indicator as confirmation it’s the most solid way to trade.

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You know there are so many volume indicators and obviously when you see bigger bars than the previous there is more volume. On the other hand, when you see smaller bars than the previous means there is less volume. I think that the first important thing which someone should know about volume is “climax”. So, what is “climax”?

When we have a big up movement in price with a big volume this is “a buying climax”. This means that many investors during the current candle are buying heavily. In the opposite condition we have the “selling climax”. A big movement down with high volume. This means that the investors in the current candle are selling heavily.

When is the right time to trade? As I said before in a buy climax the price can reach in very high levels. When the investors realize that the price is in a very high level and it’s overbought they start to sell heavily. This is the right time to trade in a case of up trend which is near the end. When you see the price near a resistance level (resistance, whole numbers, trend lines, EMAs) and a buying climax appears and after that you notice low volume or a selling climax maybe it’s time for the end of the up trend.

On the other hand, when the price is near a strong support level and a selling climax appears and after that low volume or a new buying climax maybe it’s the time for the end of the down trend.

So, the key ,as always ,is to buy in lows and sell in highs and with right volume reading and price action you can achieve this. Be careful, you should always wait to see what will happen “AFTER” the climax not during the climax appears. In the next article I will show you some good examples and I will explain you the volume indicator which I use. Stay tuned!

Best Combination of Technical Indicators – Market Maker Methods

Knowing what indicators to use and what is the best combination of technical indicators can dramatically improve your chart reading skills. If you use the wrong technical indicators, this can lead to inaccurate price interpretation and subsequently to bad trading decisions.

Our team at Trading Strategy Guides has meticulously hand-picked every technical indicator so it can give us the best performance for each individual trading strategy that we’ve created. Also, read our best ADX Strategy.

However, if you are a price action type of trader that only uses naked charts you can safely check out our ultimate chart pattern step-by-step guide.

Technical indicators make it easy for you to identify current price trends and predict where prices will move in the future. By developing effective technical analysis strategies, you can increase the amount you earn each trading day.

However, while all technical indicators are useful, they each have their own set of weaknesses. If you only use a single indicator to monitor the market, there may be certain price trends (or hazards) that you aren’t noticing.

By combining multiple technical indicators into a single trading strategy, you can limit your risk while still earning strong returns. Below, we will explain how to create a multi-indicator strategy.

A multi-indicator strategy should avoid being redundant and should use the best combination of trading indicators in a meaningful way. We also have training on the Average True Range Indicator.

A multi-indicator strategy has the danger to become redundant because many times traders use indicators that show the same type of information. To avoid being trapped by this trading fallacy you need to understand that technical indicators can be classified into three groups, as follows:

  1. Trend Following Indicators allow you to determine whether an asset is currently overbought or oversold. Many trend following indicators, such as Bollinger Bands, attempt to create a clear “channel”. A clear channel will tell you whether prices are close to breaking out or returning to normal.
  2. Momentum Indicators, such as the Relative Strength Index (RSI), allow you to determine the direction and strength of a current price trend. As an asset begins to build momentum, opening a new position will become less risky. Looking at Moving Average indicators also help you gauge momentum.
  3. Volume Indicatorshelp traders identify the (strong) relationship between price and volume. Increases in trading volume almost always result in an increase in price. However, these events do not always occur at the same time, which is why volume indicators are good for advanced forecasting. The On Balance Volume (OBV) and Money Flow are two of the most useful volume indicators.

As you can see, while these categories of indicators are trying to determine the same thing—whether prices are about to increase, decrease, or remain stable—the angle they each offer is unique. Looking at the market from multiple different angles can help you develop a more accurate, realistic, and actionable perspective.

Essentially, if you trade with a multi-indicator strategy that uses the RSI indicator, MACD indicator and the stochastic indicator you are basically using 3 types of technical indicators that belong in the same category.

These are all momentum indicators that are going to display for you the same kind of information in one way or the other. In the above figure, you can notice how all indicators follow each other simultaneously.

This is not good!

The problem with using unfitting technical indicators is that you might actually think the trade signals are stronger if all indicators point in the same direction.

The fix to the overemphasizing information from using indicators that belong to the same group is quite simple. Avoid using technical indicators that display the same kind of information. The best strategy multiple indicators combine indicators that show a different type of information.

Best Strategy Multiple Indicators

Now comes the fun part.

Moving forward, we’re going to highlight what indicators to use for the best strategy multiple indicators.

We’re going to use a momentum indicator, trend-following indicator and a volume indicator that support and complement each other.

RSI Momentum Indicator

We won’t spend any time explaining how the RSI is plotted because we live in the computer age and they do the work automatically for us.

The Relative Strength Index is a momentum indicator and a leading indicator at the same time. A lot of traders like the RSI indicator because it’s easy to use.

We use the RSI indicator to identify possible overbought and oversold conditions in the market.

Next, we’re going to mention our second indicator.

OBV – Volume Indicator

The second indicator used for our strategy is the OBV indicator.

The OBV indicator is based on the idea that both the volume and the price activity are equally important. In this regard, the OBV combines both price and volume to show you the total amount of funds going in and out of the market.

The screenshot above shows how your chart setup should look if you followed the above instructions.

The main idea behind the On Balance Volume indicator is that the market price will follow where the volume flow is going.

Now, all we’ve got to do is to name our last technical indicator that will complete the multi indicator strategy.

Ichimoku Kinko Hyo (Ichimoku Cloud)

The Ichimoku Cloud is another popular trend indicator. Ichimoku Kinko Hyo will plot several different lines on a chart that make it easy to identify future instances of strong support or resistance.

On the indicator’s chart, there will be a blue line (Kijun Sen), a red line (Tenkan Sen), a green line (Chikou Span), and a red/green band involved (Senou Span). In order to get an accurate movement reading, each of these lines will need to be accounted for.

The blue line (the base line) will plot the average of the highest high and the lowest low over the past 26 trading periods. Similarly, the red line (the turning line) will plot the average of the highest high and the lowest low over the past nine trading periods.

The lagging green line will plot the closing price 26 periods in the past. This will help provide you with a better perspective on monitoring trends.

  • The first band will be calculated by averaging the blue and red lines together.
  • The second band will be calculated by averaging the highest high and the lowest low over the past 52 trading periods.

The last step is to take the trend line and shift it 26 periods ahead. Once all of these lines are plotted together, you will have a wide-reaching view of the market. From here you will be able to decide whether there is a trend strong enough to justify opening a new position.

Bollinger Bands – Trend Following Indicator

Bollinger bands is the best trend following indicator that measures the volatility of any given market. It’s also the third indicator of our best strategy multiple indicators.

Buying and selling based on the Bollinger bands can be a very effective trading strategy especially if used in combination with other technical indicators.

Finally, your chart setup should look similar to the above chart.

Without further ado, let’s see how you can efficiently trade using multiple technical indicators and how to make consistent profits the smart way.

Multi Indicator Strategy

For our strategy, you will need to use three to four technical indicators in order to successfully trade. These indicators include the Relative Strength Index, the Ichimoku Cloud, Bollinger Bands, and On Balance Volume. Collectively, these indicators account for the trend, momentum, and volume aspects of trading that all traders should pay close attention to.

Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules of the trading strategy. For this article, we’re going to look at the buy side.

Note* This strategy can be used on any time frame so go ahead and apply it to your preferred time frame.

Step #1: Price needs to Break and Close above the middle Bollinger Band

The first step is quite easy!

Actually, the whole strategy is so easy to understand that you’ll be able to trade it right away.

So the first trade confirmation we need is for the price to break and close above the middle Bollinger band. Once this trade condition is verified, we can check the other indicators for adding more confluence to our trade signal.

Now, let’s see what the RSI indicator has to say about the price action.

Step #2: Wait for the RSI indicator to trade above the 50 level if it doesn’t already

Everything we do at Trading Strategy Guides is logical! We always try to make sense of how to correctly interpret the action of any given technical indicator.

During this step, we seek to find an agreement between what the Bollinger Bends is saying and the RSI own price reading. So, the breakout can be confirmed if the momentum is behind the move.

Usually, an RSI reading above the 50 level is considered as a positive momentum while an RSI reading below the 50 level is considered negative momentum.

Note* Not all the time you’ll see the RSI breaking above the 50 level at the same time as price breaks above the middle BB. Sometimes, we need to wait longer for the bullish momentum to show up.

Step #3: Wait for the OBV indicator to rise. Buy at the market once you see volume confirming the price.

The last trade condition before pulling the trigger is again easy to understand. We want to trade on the side with the smart money. In this regard, we look for evidence that the trade we want to take as real buying power behind it.

We can notice that the real volume only showed up later. It’s important to have patience and wait for the exact trade conditions to be satisfied before getting into a long trade.

The next important thing we need to establish for our scalping strategy is where to place our protective stop loss.

Step #4: Hide your Protective Stop Loss below the lower Bollinger Band

Knowing where to place your protective stop loss is as important as knowing when to enter the market.

The logical place to hide your protective stop loss is below the lower Bollinger band. A break below the lower BB will invalidate our trade idea, and we want to minimize our losses.

Last but not least, we also need to define a take profit level for our multiple indicator strategy which brings us to the last step.

Step #5: Take Profit when the price breaks below the lower BB

Our take profit strategy only looks at one indicator to signal us a possible exit zone. If we wait for confirmation from multiple indicators then we might as well give back some of our profits.

In this regard, the best way to take profits is when we see the price reversing. A break below the lower Bollinger Band is a good signal for a possible reversal, so we want to cash out our profits.

Note** the above was an example of a BUY trade using multiple technical indicators. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.

We choose these indicators because, as a group, they can help protect you from each other’s weaknesses while also maintaining each of their own strengths. If these indicators ever give contradicting buy or sell signals—something that does occasionally happen—it will be up to you to decide if you are willing to open a riskier position.

On the other hand, when each of these indicators confirms the signals being sent from the others, you can be much more confident with your trades. If you do end up finding multiple “green lights” at once, feel free to be a bit more aggressive with your trades.

Conclusion

You have to take the necessary time and learn the meaning of each technical indicator. No indicator will give you 100% win rates so don’t be the one chasing fairy tails. In the $6 trillion Forex market, no one can ever predict the market with exact certainty. Here is how to apply technical analysis step by step.

However, if you follow our best combination of technical indicators you can improve your chances of winning more often than losing trading the market. You have to keep in mind that all indicators are based on the past price so only a multi indicator strategy can help you predict the future.

Thank you for reading!

Please leave a comment below if you have any questions about the Best Combination of Technical Indicators!

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Using Volume Trading Strategy to Win 77% of Trades

Looking for the best volume trading strategy? Your hunt for the Holy Grail is over. With a win-rate of 77%, this can be one of the best Forex trading strategy that you’ll ever find on the internet… and it’s totally FREE.

With more than 30 years of trading experience combined, our team at Trading Strategy Guides has put together this step-by-step trading guide so you can take advantage of analyzing the strength of a trend based on volume activity.

The Forex market, like any other market, needs volume to move from one price level to another.

The Forex market is the largest and the most liquid market in the world, with 6 trillion dollars worth of transactions performed on a daily basis. If you can master volume analysis, a lot of new trading opportunities can emerge.

When we have a lot of activity and volume in the market, as a consequence, it produces volatility and big moves in the market. That’s really what most traders need in order to make a profit trading the Forex market or any other market be it stocks, bonds or even cryptocurrencies.

While you can still make money even in tight range markets, most trading strategies need that extra volume and volatility to work.

Volume Indicator Forex

In the Forex market, we don’t have a centralized exchange of total volume because we’re trading over the counter. If we look at any trading platform like TradingView, they have a volume attached to their chart. But, since we don’t have a centralized exchange that volume is coming from the feed that TradingView uses. Each retail Forex broker will have their own aggregate trading volume.

We can see that the volume in the Forex market is segmented, which is the reason why we need to use our best volume indicator.

The Volume indicator Forex used to read a volume in the Forex market is the Chaikin Money Flow indicator (CMF).

The Chaikin Money Flow indicator was developed by trading guru Marc Chaikin, who was coached by the most successful institutional investors in the world.

The reason Chaikin Money Flow is the best volume and classical volume indicator is that it measures institutional accumulation-distribution.

Typically on a rally, the Chaikin volume indicator should be above the zero line. Conversely, on sell-offs, the Chaikin volume indicator should be below the zero line.

Volume Trading Strategy

This volume trading strategy uses two very powerful techniques that you won’t see written anywhere else. These are trade secrets that we’ve only been taught to professional traders.

The Chaikin indicator will dramatically improve your timing and teach you how to trade defensively. Having a good defense when trading is absolutely critical to keep the profits that you’ve earned.

Before we go any further, we always recommend taking a piece of paper and a pen and take notes of the rules of this entry method. You can also read a million USD forex strategy

In this article, we’re going to look at the buy side.

The Importance of Buying Volume and Selling Volume

Volume trading requires you to pay careful attention to the forces of supply in demand.

Volume traders will look for instances of increased buying or selling orders. They also pay attention to current price trends and potential price movements.

Generally, increased trading volume will lean heavily towards buy orders. These positive volume trends will prompt traders to open a new position.

On the other hand, if the cash flow and trading volumes decrease– we see a “bearish divergence”, meaning that it will likely be an appropriate time to sell.

You also need to pay attention to the relative volume —regardless of the raw number of transactions occurring in a trading period. Ask yourself how is the prospective asset performing relative to what was expected?

By learning how to use the Chaikin money flow and other relevant indicators, you will easily be able to identify whether the buyer or the seller is currently “in control.”

With practice, volume trading strategies can yield wins for your portfolio 77% of the time!

Step #1: Chaikin Volume Indicator must shoot up in a straight line from below zero (minimum -0.15) to above the zero line (minimum +0.15).

When the Volume goes from negative to positive in a strong fashion way it has the potential to signal strong institutional buying power. That’s our base heavy lifting signal!

Basically, we let the market to reveal its intentions.

When big money steps into the market, they leave a mark as their orders are so big that it’s impossible to hide. When the volume indicator Forex goes straight from below zero to above the zero line and beyond, it shows accumulation by smart money.

We’re a firm believer that you get the maximum bang for your buck when you trade side by side with smart money. Chances are that institutions have more money and more resources at their disposal. Odds can be stacked against you, so if you want to change that, just follow the smart money.

There is one more condition that needs to be satisfied to confirm a trade entry.

Step #2: Wait for the Volume Indicator Forex to slowly pullback below the zero line. The price needs to remain above the previous swing low.

Once we spotted the elephant in the room, aka the institutional players, we start to look for the first sign of market weakness. Here is how to identify the right swing to boost your profit.

We’re going to let the Chaikin Money Flow indicator slowly drop below the zero line. The keyword here is “slowly”. We don’t want to see the volume dropping fast because this will invalidate the accumulation noted previously.

Second, as the volume decreases and drops below the zero, we want to make sure the price remains above the previous swing glow. This will confirm the smart money accumulation.

The Volume strategy satisfies all the required trading conditions, which means that we can move forward and outline what is the trigger condition for our entry strategy.

Step #3: Buy once the Chaikin Forex indicator breaks back above the zero line. Wait for the candle to close before pulling the trigger.

Now that we have observed real institutional money coming into the market, we wait for them to step back in and drive the market back up.

When the Chaikin indicator breaks back above zero, it signals an imminent rally as the smart money is trying to markup the price again.

We would need to wait for the candle close to confirm the Chaikin break above the zero line. Once everything aligns, we’re free to open our long position. Here is an example of a master candle setup.

*Note: The trigger candle needs to have the closing price in the upper 25%.

This brings us to the next important step. We need to establish the Chaikin trading strategy which is finding where to place our protective stop loss.

Step #4: Hide your protective Stop Loss under the previous pullback’s low

Using a stop loss is crucial if you want to have an idea of how much you’re about to lose on your trade. Never underestimate the power of placing a stop loss as it can be lifesaving.

Simply hide your protective stop loss under the previous pullback’s low. Never use a mental stop loss, and always commit an SL right at the moment you open your trades.

Trading with a tight stop loss can give you the opportunity to not just have a better risk to reward ratio, but also to trade a bigger lot size.

Last but not least, we also need to learn how to maximize your profits with the Chaikin trading strategy.

Step #5: Take profit when the Chaikin Volume drops below -0.15

Once the Chaikin volume drops back below -0.15, it indicates that the sellers are stepping in and we want to take profits. We don’t want to risk giving back some of the profits gained so we liquidate our position at the first sign of the smart money stepping in on the other side of the market.

We always can get back into the market later if the smart money buyers show up again.

**Note: The above was an example of a BUY trade using the best volume indicator. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.

Conclusion – Best Volume Indicator

The Volume Trading Strategy will continue to work in the future because it’s based on how the markets move up and down. Any market moves from an accumulation (distribution) or base to a breakout and so forth. This is how the markets have been moving for over 100 years.

Smart money always seeks to mask their trading activities, but their footprints are still visible. We can read those marks by using the proper tools. Here is another strategy on how to apply technical analysis step by step.

Make sure you follow this step-by-step guide to properly read the Forex volume. The Chaikin indicator will add additional value to your trading because you now have a window into the volume activity the same way you have when you trade stocks.

Thank you for reading!

Please leave a comment below if you have any questions about the volume indicator Forex!

Also, please give this strategy a 5 star if you enjoyed it!

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Top Technical Indicators for Rookie Traders

Starting out in the trading game? Looking for the best technical indicators to follow the action is important. It affects how you’ll interpret trends—both on positions and in the broad averages—as well as the type of opportunities that pop up in your nightly research. Choose wisely and you’ve built a solid foundation for success in speculation. Choose poorly and predators will be lining up, ready to pick your pocket at every turn.

Most novices follow the herd when building their first trading screens, grabbing a stack of canned indicators and stuffing as many as possible under the price bars of their favorite securities. This “more is better” approach short circuits signal production because it looks at the market from too many angles at once. It’s ironic because indicators work best when they simplify the analysis, cutting through the noise and providing usable output on-trend, momentum, and timing.

Instead, take a different approach and break down the types of information you want to follow during the market day, week, or month. In truth, nearly all technical indicators fit into five categories of research. Each category can be further subdivided into leading or lagging. Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of background conditions that resulted in the current price being where it is.

  1. Trend indicators (lagging) analyze whether a market is moving up, down, or sideways over time.
  2. Mean reversion indicators (lagging) measure how far a price swing will stretch before a counter impulse triggers a retracement.
  3. Relative strength indicators (leading) measure oscillations in buying and selling pressure.
  4. Momentum indicators (leading) evaluate the speed of price change over time.
  5. Volume indicators (leading or lagging) tally up trades and quantify whether bulls or bear are in control.

So, how can a beginner choose the right setting at the start and avoid months of ineffective signal production? The best approach in most cases is to begin with the most popular numbers while adjusting one indicator at a time and seeing if the output helps or hurts your performance. Using this method, you’ll quickly grasp the specific needs of your level.

Now that you understand the five ways that indicators dissect market action, let’s identify the best ones in each category for novice traders.

Key Takeaways

  • Technical indicators, by and large, fit into five categories – trend, mean reversion, relative strength, volume, and momentum.
  • Leading indicators attempt to predict where the price is headed while lagging indicators offer a historical report of background conditions that resulted in the current price being where it is.
  • Popular technical indicators include SMAs, EMAs, bollinger bands, stochastics, MACD, and on-balance volume.

Trend: 50 and 200-day EMA

We’ll start with two indicators that are embedded within the same panel as the daily, weekly, or intraday price bars. Moving averages look back at price action over specific time periods, subdividing the total to create a running average that’s updated with each new bar. The 50- and 200-day exponential moving averages (EMAs) are more responsive versions of their better-known cousins, simple moving averages (SMAs). In a nutshell, the 50-day EMA is used to measure the average intermediate price of a security, while the 200-day EMA measures the average long term price.

US Oil Fund (USO)’s 50- and 200-day EMAs rose steadily into the summer of 2020, while the instrument pushed up to a 9-month high. The 50-day EMA turned lower in August, with the 200-day EMA following suit one month later. The shorter-term average then crossed over the longer-term average (indicated by the red circle), signifying a bearish change in trend that preceded a historic breakdown.

Mean Reversion: Bollinger Bands (20,2)

USO buying and selling impulses stretch into seemingly hidden levels that force counter waves or retracements to set into motion. Bollinger bands (20,2) try to identify these turning points by measuring how far price can travel from a central tendency pivot, the 20-day SMA in this case, before triggering a reversionary impulse move back to the mean. The bands also contract and expand in reaction to volatility fluctuations, showing observant traders when this hidden force is no longer an obstacle to rapid price movement.

Relative Strength: Stochastics (14,7,3)

Market movement evolves through buy-and-sell cycles that can be identified through stochastics (14,7,3) and other relative strength indicators. These cycles often reach a peak at overbought or oversold levels and then shift in the opposite direction, with the two indicator lines crossing over. Cycle alternations don’t automatically translate into higher or lower security prices as you might expect. Rather, bullish or bearish turns signify periods in which buyers or sellers are in control of the ticker tape. It still takes volume, momentum, and other market forces to generate price change.

SPDR S&P Trust (SPY) oscillates through a series of buy-and-sell cycles over a 5-month period. Look for signals where:

  1. a crossover has occurred at or near an overbought or oversold level
  2. indicator lines then thrust toward the center of the panel.

This two-tiered confirmation is necessary because stochastics can oscillate near extreme levels for long periods in strongly trending markets. And, while 14,7,3 is a perfect setting for novice traders, consider experimenting to find the setting that best fits the instrument you are analyzing. For example, experienced traders switch to faster 5,3,3 inputs.

Momentum: MACD (12.26.9)

Moving average convergence divergence (MACD) indicator, set at 12,26,9, gives novice traders a powerful tool to examine rapid price change. This classic momentum tool measures how fast a particular market is moving, while it attempts to pinpoint natural turning points. Buy or sell signals go off when the histogram reaches a peak and reverses course to pierce through the zero line. The height or depth of the histogram, as well as the speed of change, all interact to generate a variety of useful market data.

SPY shows four notable MACD signals over a 5-month period. The first signal flags waning momentum, while the second captures a directional thrust that unfolds right after the signal goes off. The third signal looks like a false reading but accurately predicts the end of the February–March buying impulse. The fourth triggers a whipsaw that’s evident when the histogram fails to penetrate the zero line.

Volume: On-Balance-Volume (OBV)

Keep volume histograms under your price bars to examine current levels of interest in a particular security or market. The slope of participation over time reveals new trends, often before price patterns complete breakouts or breakdowns. You can also place a 50-day average of volume across the indicator to see how the current session compares with historic activity.

Now add on-balance volume (OBV), an accumulation-distribution indicator, to complete your snapshot of transaction flow. The indicator adds up buying and selling activity, establishing whether bulls or bears are winning the battle for higher or lower prices. You can draw trendlines on OBV, as well as track the sequence of highs and lows. It works extremely well as a convergence-divergence tool, as Bank of America (BAC) proves between January and April when prices hit a higher high while OBV hit a lower high, signaling a bearish divergence preceding a steep decline.

The Bottom Line

Choosing the right technical indicators is daunting but can be managed if novice traders focus the effects into five categories of market research: trend, mean reversion, relative strength, momentum, and volume. Once they’ve added effective indicators for each category, they can begin the long but satisfying process of tweaking inputs to match their trading styles and risk tolerance.

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