How to use tick volume indicators in trading?

How to use tick volume indicators in trading?

2022-10-31 • Updated

If you trade stocks, you have information about the volumes of trading provided by a stock exchange. This info allows you to see whether market players back up a price's trend or not. On the currency market, the situation is different, but traders can still get insights from volumes. This article will share the most helpful information about the volumes you need to know.

Volume in Stock Market

Before we give you more details about volume indicators, let’s understand what volumes in trading are. The trade volume is the total quantity of shares or contracts traded for a specified security or across the whole market within a particular period.

Trade volumes help to understand a given security's market activity and liquidity. If the security is actively traded, its trade volume gets higher. Alternatively, the low trading volume appears on less traded securities. Trade volumes can help stock traders to get a clue about big market players’ trading decisions. For example, if rising volumes follow a considerable price change, we can suggest the beginning of a new trend.  

Each market exchange analyses volumes for traded securities and provides volume data. Interestingly enough, volume is higher near the market open and close. That happens because orders placed when the market was closed get triggered. The picture below shows the price dynamics of the Tesla stock on a Nasdaq stock exchange on September 30. As you can notice, the highest volume was when the market opened, but it cooled down during the day.

Most brokers provide information about trading volumes for instruments available through their trading platform. They gather this information from the market exchanges.

  The price dynamics of the Tesla stock on a Nasdaq stock exchange on September 30

Tick volume

The Forex market is decentralized, so it's impossible to count all the contracts and their sizes like in stock markets. As a result, Forex traders use indicators of tick volume.

A tick is any single change or movement in the quote up or down. MetaTrader measures the number of ticks during a single period. Thus it's possible to see how actively the market traded in particular moments. In other words, we don't know whether there were 500 or 500,000 orders within a certain period, but we know how many ticks the price moved. This is what a tick volume is. It's essential to understand its nature.

How to implement tick volume

MetaTrader offers several indicators of tick volume. To apply them, click "Insert", then "Indicators", and choose "Volumes". There are four indicators:

Volumes

The indicator shows the number of price changes (ticks) within each period of a selected timeframe. Volume bars are painted green if they are bigger than the previous ones and red if volume declines.

On Balance Volume (OBV)

The indicator is represented in the form of a line. If the close price of the current candlestick is higher than that of the previous one, the present volume is added to the previous OBV, and the line goes up. If the current candlestick close price is lower than the previous one, the current volume is subtracted from the previous OBV, which makes the indicator go down. It's assumed that OBV changes precede price changes so that they can provide signals.

Money Flow Index (MFI)

Money Flow Index shows the rate at which money is piled into an asset and then withdrawn from it. Regard it as a version of RSI that takes into account volumes.

Accumulation/Distribution

This is another indicator calculated based on both price and volume. The higher the volume, the more significant the contribution of the price change (for this period) to the indicator's value.

Using volumes for technical analysis

You can use indicators of tick volumes in technical analysis in several ways. Let's look at them in detail and check examples.  

Measure the strength of a trend

The Volumes indicator in MetaTrader 4 or 5 is a good tool for checking the trend’s strength. Let’s check how to do that right. First, implement the Volumes indicator on the chart. For confirmation of an uptrend, you need to see the price moving higher with rising volumes.

Volume indicators in MetaTrader

In the picture above, you can see that the price was making new highs with rising volumes. Volumes dropped during the periods of correction/consolidation. The last spike to the upside happened while the volumes were falling – a sign of an upcoming reversal.

To confirm a downtrend, you must see prices making new lows with rising volumes. When the price goes lower, but the volumes don’t update a new high – this is a sign of a reversal to the upside.

Volume indicators in MT5

The chart above demonstrates a definite bearish trend with minor corrections. The price made a new low, but the Volumes indicator dropped. As a result, we can expect the price to move higher.

Spot reversals early

It’s always difficult to distinguish between a reversal and a correction at an early stage. Volume indicators help to do it sooner and join the new trend as early as possible.

As you know, different signals can tell traders if a reversal is coming. The most popular and reliable patterns are chart patterns (head and shoulders, double top/bottom), candlestick patterns (i.e., hammer, morning/shooting star, engulfing patterns, and harami), and breakout of significant levels.

Experienced traders know that it’s dangerous to enter the market blindly. Therefore, any reversal signal needs to be confirmed. To confirm a change of direction on the chart, you need to wait for the desired situation and use the Volumes indicator.

Spot reversals early with volume indicators

On the chart above, a Double Bottom pattern was formed. The Volumes indicator was getting lower near the patterns, which signals a weakening trend.

If there's a divergence between the price and the volume indicator, it signals a potential reversal of the existing trend.

Signal of a potential reversal of the existing trend

Confirm a breakout

Volumes are usually low during a consolidation period. If a spike in volume accompanies a range breakthrough, there's a higher chance that this is a real and not a false breakout.

Confirm a breakout with volume indicators

Let’s look at the example above. Volume rose at the moment when the price went above a resistance level. This helped the price continue moving in the direction of a breakthrough.

There are also situations when the breakout is fake. Fake breakouts aren’t a rare thing. They usually signal manipulations by institutional players. Sometimes, their actions can be noticed on the charts as patterns. You can use Volumes to spot these fake breakouts. If the breakout happens on low volumes, it’s better to avoid entering this trade.

  The signal of the fake breakout

On the daily chart of Apple, you can see that the price broke above the resistance line with the Volumes indicator at a very low level. At the same time, the Bearish Engulfing pattern was formed with a big bearish candle after the green one that caused a breakout. That was a strong reversal signal confirmed by the rising Volumes indicator.

Identify strong areas of support/resistance

The areas where the price is trading with high volumes may represent significant obstacles in the way of the price and, consequently, good entry and exit levels for traders. For example, on the chart below, you can see huge spikes in Volumes every time the price hits the critical support level.

  Identify strong areas of support with Volumes indicator

Questions about Volume Indicators

Since you know the main details about the Volumes and their implementations in trading, let’s consider the main questions a newbie trader may face.

What is Volume Indicator in MetaTrader?

The Volumes indicator in Metatrader is the standard indicator of the indicators set in MT5. You can find it by clicking Insert-Indicators-Volumes-Volumes. It shows the number of price changes within each period of a selected timeframe. For stocks in MT5, this is the indicator of actually traded volumes.

Measuring trend strength with volume indicators

In the chart above, you can see that the Volumes indicator consists of red and green candles. The green color means that the current bar's volume is larger than the volume of the previous bar. On the contrary, the red color means that the current bar's volume is smaller than the volume of the last bar.

What Trading Signals Can Be Provided by Volume? 

There are several signals you can get from the volumes.

First, the Volumes may provide information about the strength of reversals. If a potential sign of reversal appears on the chart, the rise in Volumes can tell you that the reverse is so strong it signals a possible trend change. 

Second, a rise in Volumes can help you to confirm a breakout. For example, if the price is pressed to the critical support or resistance level, a breakout of that level with high volumes confirms that the breakout is not fake. On the contrary, a breakout with low volumes tells that the momentum may be short-lived.

How to Interpret the Volume in the Case of a Pullback?

A pullback is a temporary retracement of the price during an uptrend. If you are a trend trader, you can use Volumes to distinguish a short-term correction from an actual reversal. If low volumes follow a price change, you are likely dealing with correction, not a setback. On the contrary, a change in price with high volumes signals a downtrend.

Conclusion

MetaTrader volume indicators aren’t independent signal providers but can be used for confirmation. After all, the dynamics of volume tell us better than anything how active the trading is. This is a unique knowledge that isn’t provided by other indicators. As a result, the volume indicators will contribute significantly to your trading system.

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