What Does Volume Mean in the Market?

01 September 2020

    Market volume indicates the number of units of an asset being traded over a given period of time. In OTC markets (like CFD trading), volume cannot be accurately measured, since trading does not take place in a centralized venue, but rather in a peer-to-peer fashion. Thus, the volume is approximated by counting the number of streamed ticks during the specified period.On symbol charts, volume is usually plotted on the bottom of the charts with bars indicating the volume traded during the specific time period. Below we can see the tick volume representation plotted at the bottom of the chart in Fondex cTrader.


    The tick volume representation


    Volume is often correlated with the formation and exhaustion of market trends. When the trading volume is increasing, it means that more money enters the market and the price is pushed to a certain direction. If the volume continues to increase - this is an indication of trend continuation. On the contrary, when volume starts decreasing, this is usually considered a sign of the trend losing steam, as well as an early indication of a possible trend reversal. The purpose of volume indicators is to use various mathematical formulas to convert volume data into a readable piece of information about the current volume activity of the symbol in question. 


    Volume Indicators List


    As mentioned above, volume is the data source of several indicators. Many of them can be found in Fondex cTrader. The list of Fondex cTrader volume indicators is as follows:


    1. Chaikin Money Flow


    2. Ease Of Movement


    3. Money Flow Index


    4. Negative Volume Index


    5. On Balance Volume


    6. Positive Volume Index


    7. Price Volume Trend


    8. Trade Volume Index


    9. Volume Oscillator


    10. Volume ROC


    To see the available built-in volume indicators in Fondex cTrader, right-click on the chart and navigate to Indicators > Volume. 


    built-in volume indicators in Fondex cTrader


    You can also find more indicators developed by the community, by searching in the relevant search box. 


    indicators search box


    In this article, we will focus on the On Balance Volume Indicator. We will explain what it is, how it is calculated, how to interpret it, and how to use it in trading.


    What is On-Balance Volume (OBV)?


    On Balance Volume (OBV) is a technical analysis indicator that relates the price movement with the market’s volume flow. OBV was introduced by Joe Granville in his 1963 book “New Key to Stock Market Profits”. It was one of the first indicators to measure positive and negative volume flow. The OBV indicator is calculating a cumulative total volume, and is used to measure buying and selling pressure.


    How OBV Indicator is Calculated


    The formula to calculate the OBV indicator is the following.


    How OBV Indicator is Calculated



    In simple words, if the last bar’s closing price is higher than the opening price, then the bar’s volume is added to the previous OBV result. if the last bar’s closing price is lower than the opening price, then the bar’s volume is subtracted from the previous OBV result. If opening and closing prices are equal, then no volume is added to the previous result.


    How to Interpret the OBV


    To add the OBV Indicator in Fondex cTrader, right-click on the chart and navigate to Indicators > Volume, then click on the On Balance Volume. You will get the Add Indicator form as shown below:


    How to Interpret the OBV


    This indicator does not have any parameters by definition, but in Fondex cTrader you can choose a source and a shift, if you wish to do so. By default, these settings are set to Close and 0 - the most commonly used. You can see the indicator plotted on the bottom of the chart.


    How to Interpret the OBV


    The OBV indicator is showing how the volume is related to the price movement, and if the price action is supported by an equivalent strong volume. If, for example, the price is trending upwards and the OBV indicator is also in an upward trend, then the bullish trend is strong and a further rise of the price could be expected. But if the two trends start diverting e.g. the price movement is still trending upwards, but the volume is falling, or the OBV is changing direction, then traders can prepare for a reversal. 


    How to Use OBV Indicator in Trading


    The OBV indicator is a leading indicator, which besides confirming trends, can predict price reversals and trend exhaustions. The most popular way of using the OBV Indicator is by looking for divergences. A divergence is a scenario where the indicator is moving to the opposite direction of the price. In the case of the OBV indicator, a divergence occurs in the following two cases a) the price moves upwards following a buying trend, but the OBV indicator moves downwards c) the price moves downwards following a selling trend, but the OBV indicator moves upwards.


    The EUR/USD chart below, taken from Fondex cTrader, demonstrates an example of trading the OBV divergence. The first thing we notice on the chart is that the price is in a strong bullish trend that respects the relevant support trend line. Nevertheless, at a certain point we see that the OBV indicator starts diverting to the downside, even though the price still reaches new highs. This is an early indication of a price reversal. As soon as the price breaks the resistance line, we can consider this event a confirmation, and place a short trade on the symbol.


    How to Use OBV Indicator in Trading


    As we can see from the chart, the price indeed reverses into a bearish mood and a short trade would have made us some nice profits. We can apply the same logic in a reversed manner for bullish signals.


    All in all, the OBV indicator is a useful tool for financial market participants that allows them to understand the movement of money within the markets. It demonstrates the strength of trends and gives hints for possible reversals. As shown above, when combined with other technical analysis tools, like support and resistance lines, it can produce some very profitable trading signals.


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