Volume Based Technical Analysis
Money Flow, Volume Accumulation and Volume Surges
When it comes to volume-based technical analysis, there are three main factors that traders and technical analysts look at. They are money flow, accumulation of bullish and bearish volume and volume surges.
In technical analysis, Money Flow is used to see whether money is coming into a security (stock) or leaving the security, whether investors are coming into the market or they are leaving it. As a rule, volume-based technical indicators are the only tool that defines it. Advance decline issues and volume could be indirectly used to do it, but volume analysis is considered to be more accurate in defining Money Flow direction clearly.
Such indicators as SBV Oscillator, Money Flow Index (MFI), Chaikin Money Flow (CMF) and others are usually used to define Positive (Bullish) and Negative (Bearish) money Flows. As a rule, technical analysis defines periods of Positive Money Flow when indicators (mentioned above) are in an up-movement. Conversely, when those indicators decline, Money Flow is considered to be Negative.
You can read more about Money Flow and how to use it to generate signals in the "Money Flow Analysis" article.
Bullish and Bearish Volume Accumulation
Bullish and bearish volume accumulation is another aspect that can be obtained from the analysis of volume. In technical analysis, bearish and bullish volume accumulations are used to define how strongly a stock, index or market is overbought or oversold.
Examples of indicators that are used in technical analysis to monitor bullish and bearish volume accumulation are SBV Oscillator, Chaikin Money Flow (CMF), and Volume Accumulation Oscillator (VAO), etc. On these indicators, green areas (the area between the indicator and the zero line when the indicator is above zero) mark bullish volume accumulation and red areas (the area between the indicator and the zero line when the indicator is below zero) mark bearish volume accumulation.
The general idea behind evaluation of bearish and bullish volume accumulation is that the larger and more prolonged in time the volume accumulation is, the stronger is the stock, index or market that is overbought or oversold and the stronger is the reversal movement that can be expected.
You can read more about analysis of bullish and bearish volume accumulation in the "Volume Accumulation" article.
Volume Spikes and Surges
Analysis of volume surges is considered to be one of the most important types of technical analyses that can reveal the actions of big institutional traders. When you see large volume, you know that "the Big Money Boys are in action"
Technical analysis tells that a big volume surge leads to a shift in the supply demand balance. During a big volume surge, a large number of shares changes hands. Furthermore, after the volume surge, the number of buyers (those who still want to buy) and the number of sellers (those who still want to sell) are not the same as before the volume surge. That is why in the majority of cases, the price reacts by a reversal movement on a volume surge. There are only two rules:
- A reversal movement downward can be seen after a volume surge to the price up-move;
- A reversal movement upward can be seen after a volume surge to the price down-move.
You can read more about analysis of volume surges on the "Analysis of Volume Surges" article.
NEXT: Money Flow
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