The trend of a forex currency pair depends on the volume traded. Most of the unsuccessful forex traders make the mistake of focusing massively on trend and momentum indicators while ignoring volume indicators.
To have consistent wins, you should balance the analysis of the four technical indicators. These are trend, momentum, volatility and volume indicators. In addition, it would help if you understood when, where and how to use each of the subdivisions of the technical indicators.
Here, you will find out how to maximize the power of volume in your trading using three typical indicators. These are Chaikin Money Flow, On-Balance Volume and the Klinger Oscillator. Read on to find out more.
1. Chaikin Money Flow
Use Chaikin Money Flow (CMF) if you want to determine whether your target currency pair is undergoing accumulation or distribution.
According to Dow Theory, the accumulation phase is when expert traders enter the market. Here, the prices are low, promising them remarkable profit when the bearish market reverses. Most of the expert traders here are institutional traders.
The second market phase is the public participation phase. This is where most typical traders enter the market. At this point, the trend is apparent to novice traders, and they are optimistic about the price rising. It mainly the dawn of a bullish market.
The last market phase is distribution. Here, the uptrend is about to start reversing. However, many uninformed traders still believe the bullish market is occurring when exiting the market.
Knowing the phases is crucial for day trading that Chaikin Money Flow was initially designed for. It helps you to determine the market phases in the following ways.
If the CMF is nearer the high closing price, accumulation has occurred. On the other hand, if the CMF is closer to the low closing price, it means distribution has taken place.
2. On-Balance Volume
On-Balance Volume (OBV) operates on the principle that volume precedes price movement. Therefore, the technical indicator monitors the positive and negative forex trading volume.
OBV can tell you the buying or selling pressure on a currency pair by relating the volume change to price motion.
Use the OBV to determine the breakout direction for a ranging market. Additionally, it can enable you to realize support-resistance levels and market reversals.
As a cumulative indicator, its current value depends on the previous day’s closing value, as shown below.
If the current candlestick’s prices close above the previous one, take its volume and add to the previous OBV. Here, the market is bullish.
OBV = Previous OBV + Current Day’s Volume
If the candlestick’s current price equals the previous candlestick’s closing price, the OBV does not change.
OBV = Previous OBV
If the current candlestick’s prices close below the previous one, subtract its volume from the previous one. Then, the market is said to be bearish.
OBV = Previous OBV + Current Day’s Volume
3. Klinger Volume Oscillator
Unlike CMF and OBV, which are most applicable for day trading, the Klinger volume oscillator also tells you the long-term trend of the price motion.
It monitors inward and outward price motions with the help of a signal line. It does this by finding the difference between two EMAs (Exponential Moving Averages) and then converting them into an oscillator.
You can change the (13-period MA) signal line to forecast your short-term or long-term trading strategy. Besides, it can help you realize market entry and exit periods.
For instance, a bullish signal arises when the Klinger volume oscillator starts rising, whereas the currency pair’s price continues to fall. A bearish signal, by contrast, occurs when the Klinger oscillator starts to fall while prices continue to rise.
Likewise, you can use the Klinger volume oscillator to determine trend. During the uptrend, the oscillator rises above the signal line. Here, you can enter buying contract.
Contrarily, the oscillator falls below the signal line, from above, during the downtrend.
It would be best to understand and apply volume indicators since volume traded usually cause price changes. The most typical volume indicators are Chaikin Money Flow, On-Balance Volume and the Klinger Volume Indicator.
They enable you to realize accumulation/distribution phases, resistance/support levels, and bullish/bearish markets.