You may have heard from some people that they earned a lot of money from day trading. One of the many ways to make money is to use volume indicators and I’m going to show you the best volume indicator for day trading.
Getting successful in day trading can be a hit or miss so if you intend to become a day trader, you need to prepare for it.
Day trading is the act of buying and selling in just a single day.
This could be done in minutes or hours depending on the trader’s preference. The goal of a day trader is to make profits from short-term price movements in the market.
Because of this, they look for markets with high volatility or volume so day traders frequent the stocks and forex markets. They also trade according to current events so they refer to news to base their trading decisions and find opportunities in the market.
It would seem like day trading is a pretty easy trading style, but in actuality, it is considered one of the riskiest.
For one, the high volatility of the market is an advantage and also a disadvantage. Day traders thrive in volatility but if they do not know how to work their way around it, they would end up incurring more losses than profits.
It can also get expensive for a typical trader since $25,000 is the minimum required account balance to trade. There are also other fees needed to be considered.
But probably the biggest problem day traders face is the stress that goes with it. Focus and discipline are the traits that a day trader should have to maintain stability throughout their trading sessions.
If they lack control in the emotional and psychological department, day trading could be a dangerous set up for them.
That does not mean that day trading cannot be profitable.
In fact, there are many traders who have already been successful with it. If you have enough capital and knowledge to dive into day trading, you can go for it.
So what is the secret to a fruitful day trading?
Strong emotional and psychological capacity and also a solid strategy. Part of having a good strategy is using price and volume indicators to determine entry and exit points and the trend of the market.
The foundation of good day trading is to have a well-thought-out strategy that would guide you all throughout and one aspect of it that you should give importance to is technical analysis.
How Does a Volume Indicator Work?
Technical analysis is a skill that every trader should have but more so with day traders. They need to have formidable technical analysis skills to match the high volatility of the market. But other than the volatility, there is another aspect of the market that should not be ignored and that is the volume.
Volume refers to the number of assets being traded in a period of time and is considered to be one of the most important indicators in day trading. Traders monitor the asset’s price movement to determine the market participants’ interest in that asset. Volume displays the potential trends in the market and day traders depend on it to make trading decisions. Once they are able to understand the ongoing trend, they can identify the best entry and exit points in order to make a profit.
How Do You Trade With a Volume Indicator?
Interpreting volume is important in trading. It confirms chart patterns and trends based on an asset’s price movement which is extremely helpful for day trading. Traders can determine whether a trend is going to continue or will hit a reversal by just monitoring the volume.
As a rule of thumb in trading, when the trade is in a constant upwards or downwards movement with a high volume backing it up, it means the trend is strong and most likely going to continue. Additionally, it also means that an upward trend signifies the aggressiveness of buyers while a downward trend signifies aggressive sellers.
There is a possibility of a trend reversal if there is price movement but there is a low volume behind it. This is why volume is a great indicator when day trading because it helps predict the price movement on which traders can make decisions.
Best List Of Buy and Sell Volume Indicators
In day trading, traders try to gain profit from short-term price movements in the market and these price movements are driven by volume. With the help of a volume indicator, the trader can determine the best trading opportunities in the market and eventually profit off of them. But with so many indicators available, what are the best volume indicators? Below are some of them:
- Volume Relative Strength Index (RSI). It is used to determine whether the volume traded when price closed higher (bullish) or volume traded when price closed lower (bearish) is stronger. The Volume RSI is calculated similarly as the price-based RSI except it uses volume data and also interpreted the same way.
- On-Balance Volume (OBV). The OBV is one of the simplest and easiest indicators to use. It measures volume to predict the price changes of an asset.
- Money Flow Index (MFI). This indicator is similar to the RSI and is used to identify oversold and overbought positions. The only difference between them is that MFI uses both price data and volume data in their calculation.
- Volume Profile. This indicator shows how much volume an asset is traded at a given period of time. It also helps in identifying key support and resistance levels and it can be used in any time frame.
- Accumulation and Distribution (A/D). The A/D indicator is used to determine whether an asset is accumulated or distributed based on its price and volume. It is also used to confirm an upward or downward trend. Accumulation happens when traders start buying an asset as its price rises and distribution happens when these traders start to exit their trades.
- Chaikin Money Flow (CMF). CMF measures the total money flow volume at a given period which is usually 21. This indicator oscillates on the zero line and if it rises above the zero line, it indicates a bullish trend and a rise in buying pressure. On the other hand, if it falls below the line, it indicates a bearish trend and a rise in selling pressure.
- Volume-Price Trend (VPT). VPT is used to determine price direction and its strength. If there is an uptrend, the volume should be high when the market closes up and if there is a downtrend, the volume should be high when the market closes low. The VPT should also follow these rules as well, however, if it does not, it indicates a bearish or bullish divergence.
- Volume Weighted Average Price (VWAP). This indicator shows the average price an asset has been traded throughout the day. It displays the value of the asset and provides insight on its trend. The VWAP indicator also shows the average price that both sellers and buyers are willing to transact.
Volume is one of the most commonly used indicators in trading which is why you can use it in many trading platforms available. In day trading, this should be the first thing you need to find out if the platform supports it. Take note that in the Forex market, actual volume figures cannot be measured. Instead, the term “tick” is used to represent the value of the Forex volume.
How to Use a Volume Indicator with MetaTrader4 (MT4)
MetaTrader4 or MT4 is probably the most popular trading platform among traders. This platform was developed by MetaQuotes Software Corp. and is specifically designed for trading the Forex and futures markets. Many traders prefer this platform due to the following features:
- User-friendly and easy-to-use
- Can be accessed in a browser
- Enables automated trading
- Has advanced charting capabilities
What is great about MT4 is that it has 30 built-in indicators that you can use in your trading. There are also 2000 free customized indicators and 700 paid indicators if you are looking for more tools to assist and improve your technical analysis. In the MT4 platform, the built-in indicators are under four categories:
- Bill Williams
Under the ‘Volume’ category, there are options you can use depending on your need. But if you are looking for more specific indicators, you may customize your own with the MT4’s programming language or download indicators from other sources.
Another thing that traders love about MT4 is that it is easy to backtest with the platform so you can see whether your chosen indicator and strategy works well.
How to Use a Volume Indicator with TradingView
TradingView is a cloud-based trading platform that provides comprehensive information and insights about the market. Many traders also use this platform due to the following features:
- Easy and fast user interface
- Great technical analysis (charts, screening, backtesting)
- 100,000+ indicators and strategies
- Has a large community to connect and learn
The features above are available with their free one-month trial and if you want to access more features, you need to sign up with their Pro account.
To use an indicator in TradingView, there is an “Indicator” tab above the chart area wherein it contains all indicators that the trading platform provides. Under this tab, indicators are also divided into four categories:
- Public Library
- My Scripts
- Volume Profile
In the Built-ins category, the most common indicators can be found here such as MACD, RSI, Moving Averages, etc. Public Library indicators are the customized indicators by other traders that can be used by anyone. If you have your own indicator, you can access it in the My Scripts category.
For day traders, the Volume Profile category is the most useful since it contains more advanced indicators that give more information about the market volume. However, this is only accessible for TradingView users with a Pro account.
Volume Market Trading Strategies
Indicators such as volume are what reinforces a trading strategy. Without an indicator, traders might find it difficult to interpret information displayed in the chart. They would also find it hard to find the most profitable trading opportunities if indicators are not utilized. Day traders especially need volume indicators incorporated in their strategy if they want to make a profit.
What is the Best Volume Indicator?
Although volume is one of the best indicators when trading, there is no single volume indicator that can be used for all. A volume indicator can confirm the validity of a setup but most of them are better when used with other indicators. This is to provide more insight about the price movements and trends so that the trader can have a clearer view on where to place entry and exit points.
Which Indicator Is Best For Intraday?
Again, there is no single indicator that can be called as the best for intraday trading. Each trader has a different approach depending on their strategy and so intraday traders may have different opinions on this. However, the most commonly used indicator by intraday traders is the Volume Weighted Average Price or VWAP.
The VWAP is an indicator that shows the average price of an asset throughout the day. It also shows any insight on the current trend and the value of an asset. This allows traders to identify the best entry and exit points of a trade.
Is High Trading Volume Good Or Bad?
Evaluating the trading volume of an asset is important if you want to make a profit. Trading volume shows how often an asset is traded over a period of time and it is considered high volume if it is heavily traded. But trading volume is not the only thing traders look at but also the price of an asset. Volume and price go hand-in-hand which allows traders to interpret the movement of the asset better.
Day traders prefer high trading volume assets because they are able to enter and exit a trade much more quickly. High trading volume assets also indicate that there is higher interest in them which entails big price movements, therefore, traders can take many positions.
How Do You Do Trade Volume Analysis?
As mentioned before, volume and price go together in trading. With volume analysis, you can analyze an asset’s behavior and it makes it easier for you to place entry and exit positions.
To understand better, volume analysis is a matter of supply and demand. When supply is declining, prices go up. The same goes for the opposite; when demand is declining, the prices go down. This simple logic enables the trader to gain insight on what makes the asset’s price behave in a way.
For example, when an asset’s price rises up with high volume, it means that it is sustainable and shows a great chance that it will continue to rise up. However, when the price rises but with only little volume, this alerts the trader for a possible reversal.
To conclude, volume analysis is important to determine the best entry and exit strategies. It is also important to reduce losses you might incur. It also confirms chart patterns which you might use to your advantage by taking appropriate actions when you see significant behaviour from an asset.