Fortunately, the basic signals conveyed by volume data are easy to read. When a stock is traded, the transaction is recorded and included in the daily volume. When volume levels spike for a stock, index or exchange, the spike points to a price at which a large portion of ownership has changed hands. These prices are significant because they mark a break-even point for the new shareholders and are likely candidates for support/resistance levels - the larger the spike, the more significant the price.
Over time, if price moves steadily upward with strong volume, this indicates that buyers are accumulating shares and supply is becoming increasingly limited: bulls are winning the fight. Conversely, if price moves steadily downward with strong volume, sellers are unloading shares and outstripping demand: bears are taking this battle.
Cumulative Volume Index
By separating the up volume from the down volume, traders can design internal indicators to support their assertions about the direction of the given stock, index or market.
The first indicator we examine is called the cumulative volume index, or CVI. CVI is calculated by subtracting the down volume (that is, how many shares of losing stocks changed hands) from the up volume (the tally of shares traded in winning stocks) each day and adding that number to the previous day's value for CVI.
The formula looks something like this:
A chart of cumulative volume is usually drawn with a line connecting each day's value. The chart can be analyzed in the same manner as a price chart: by drawing trendlines to indicate direction and support/resistance levels. The actual value of cumulative volume is not important - only the direction and pattern of the chart matter.
CVI = (Up Volume - Down Volume) + Previous Day's CVI
The chart of cumulative volume is most useful when drawn together with a price plot. In this format, look for cumulative volume to reach new highs or lows in tandem with price. This situation indicates that the majority of shares are taking part in the market's direction, so the move can be confirmed. When cumulative volume fails to track the movement in price, a divergence is signaled, indicating that the majority of stocks are not taking part in the move. Look for reversals near these locations on the price chart.
On-balance volume (OBV) is quite similar to the cumulative volume index, but OBV adds or subtracts each day's volume from the previous day's volume based on whether the price moves up or down.
If today's price is higher than yesterday's, the formula for on-balance volume looks like this:
If today's price is lower than yesterday's, this is the formula:
OBV = Previous Day's Value + Today's Volume
A chart of OBV is interpreted in the same way as a chart of cumulative volume. The chart should look similar to the price chart, and it can also be studied with trendlines and moving averages.
OBV = Previous Day's Value - Today's Volume
Up/Down Volume Spread
The up/down volume spread is similar to cumulative volume, except the difference isn't added together each day. The formula is simply this:
This calculation creates a fast oscillator that revolves around a zero line. Traders can fine-tune a moving average of volume spread to smooth the signals. As the oscillator crosses the zero line, watch for a change in trend. When the oscillator reaches its extremes, the market could be overbought or oversold. Again, here it is useful to study volume spread in conjunction with a price chart.
Volume Spread = Up Volume - Down Volume
Up/Down Volume Ratio
Just as its name indicates, the up/down volume ratio is up volume divided by down volume:
A value of 3, for example, indicates that three times as many shares advanced as declined on a given day. The chart can be smoothed using a moving average if so desired. Look for a peaking ratio value at new highs to confirm an upward move in stocks. Fractional values indicate market weakness and should be used to confirm new lows on the price plot.
Volume Ratio = Up Volume / Down Volume
Accumulation/Distribution & the Chaiken Oscillator
Designed by Marc Chaiken, the accumulation/distribution indicator is based on the assumption that when a stock or index closes near its high of the day, traders are accumulating shares. In other words, accumulation/distribution weighs volume according to how close to a given day's high or low a stock or index closes. The formula for weighted volume looks like this:
Weighted Volume = Volume [(Close - Low) - (High - Close)] / (High - Low)This value is then used to calculate accumulation/distribution:
Accumulation/Distribution = Weighted Volume + Previous Day's ValueThe same rules for interpreting the other volume indicators apply to the accumulation/distribution line. It is used to confirm price movement in a given stock or index. It should be plotted in its own pane and can be smoothed with a moving average.
A similar indicator called the Chaiken Oscillator further refines the accumulation/distribution line by calculating the spread between its three-day and 10-day exponential moving averages. The formula looks like this:
Chaiken Oscillator = Three-day EMA of A/D - 10-day EMA of A/DBelow is an example of a bar chart of the Dow Jones Industrial Average with its accumulation/distribution line and Chaiken Oscillator below it:
As the Dow Industrials reach a new intermediate high in early September, the accumulation/distribution chart below it confirms the move by also reaching a new intermediate high, but the Chaikin Oscillator points to slowing momentum because it fails to reach the level of its last peak.
The force index combines price and volume into one value, attempting to measure the force behind a move in price. It can be read as an oscillator or cumulatively. Here's the formula:
Force Index = Volume(Today's Price – Yesterday's Price)Crosses above and below the zero line can be read as a change in market trend. Because of the volatility of the force index, using a moving average to smooth and fine-tune the signals can be helpful.
Keep in mind that this overview is not to meant to be an exhaustive study, but a useful primer for the novice market technician. It may be difficult to find a free source for a few of these charts but StockCharts.com provides free charting tools, and many of these indicators are included. Most professional trading software packages include all of the above data and charts for those willing to pay a steep price.
Market Breadth: 52-Week Highs/Lows
TradingLearn how to read the volume reports, look at the relation to liquidity and interpret volume using open interest.
TradingThe basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
TradingMeasure the flow of intraday volume to estimate the emotional intensity of the crowd.
TradingBy Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The on-balance volume indicator (OBV) is one of the most well-known technical indicators and it focuses on the importance ...
TradingKnowing the trading volume of a stock helps traders understand price movements and forecast future movements. This short guide helps investors locate actively traded data.
Managing WealthMarket bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
TradingThe first few moments of trading provide a lot of information. If a trader analyzes this information, it can give a lot of insight into the market's moves for the day.
TradingBy Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.comAccording to Dow theory, the main signals for buying and selling are based on the price movements of the indexes. Volume ...
MarketsVolume is drying up for U.S. equities. Here's what it means.
TradingTechnical indicators determine the direction of an asset’s momentum and whether that direction will continue. Here are seven used most.