Volume

Introduction to Volume
Volume is one piece of information that is often neglected by many market players, especially
the beginners. However, learning to interpret volume brings many advantages and could be of
tremendous help when it comes to analyzing the markets. The usage of volume indicators has
long been restricted to just the Forex Markets. In this MasterClass on Volume Indicators, we’ll
be talking about an in-depth study of using the most popular volume indicators for trading
cryptocurrencies on Mudrex.

The following Part – 1 of our MasterClass on Volume Indicators will cover the most interesting
and useful interpretations of traded volume in general, followed by the various use cases of the 4
most popular volume indicators in the upcoming articles:

 Part – 1: Introduction to Volume

 Part – 2: On Balance Volume (OBV)
 Part – 3: Volume Weighted Average Price (VWAP)
 Part – 4: Money Flow Index (MFI)
 Part – 5: Chaikin Accumulation/Distribution Oscillator (A/D)

Definition
Traders often use volume—which measures the number of shares traded during a particular time
period—as a way to assess the significance of changes in a security’s price. Traders rely on it as
a key metric because it lets them know the liquidity level of an asset, and how easily they can get
into or out of a position close to the current price, which can be a moving target.
Volume analysis is a technique used to determine the trades you will make by discovering the
relationships between volume and prices. In order words, it shows how many times the security
has been bought or sold over a given timeframe. The time frame can be one minute, four hours,
one day, or anything.
Chart
In most charting platforms, the volume indicator is presented in a separate window below the
price chart, just like other indicators used in technical analysis. The volume transacted in the
given timeframe is represented as a bar, which can be color-coded.
The color of the bar shows whether the security’s price closes up or down. A green bar is
generally used to show that the security closed higher during the trading session while a red bar
is used to indicate that the security closed lower. The height of the bar shows whether there’s an
increase or a decrease in volume of the security transacted — a taller bar shows a higher volume
while a shorter bar shows a lower volume.

1
 Traded volume bar graph at the bottom

Interpretations
While not every large increase or decrease in trading volume is significant, it can potentially give
you a sense of the true strength behind a price move. The idea is that above average and/or
increasing trading volume can signal that traders are truly committed to a stock, while below
average and/or decreasing volume can signal a lack of enthusiasm among traders.
Trend Confirmation
When using volume, traders look for either confirmation or non-confirmation to help confirm or
deny the possible strength or direction of a trend.
 Confirmation (Chart 1): Volume increases as the stock trends in either direction. An uptrend
with increasing and/or above average volume implies investor enthusiasm for that stock or asset is strong,
which could lead to more buying and even higher prices. A downtrend accompanied by increasing and/or
above average volume implies investors have doubts about the stock, which could lead to more selling
and even lower prices.

Confirmation & Non-Confirmation

2
 Non-Confirmation (Chart 2): Volume does not increase or actually decreases as the stock trends
upward. An uptrend without increasing and/or above average volume suggests investor enthusiasm is
limited. While the price could continue to rise, many traders who use volume analysis will still look for
other candidates. A downtrend without increasing and/or above average volume implies investor concern
is limited. While the stock’s price may continue to fall, traders who use volume analysis may start to
follow the stock and watch for signs of a pickup that is supported by increasing volume.

Volatility
Pay attention to days that have higher-than-usual volume. Such days usually have volatility and
large price moves either up or down. Increased volume typically shows that something has
happened with the stock. Typically, a news release or active traders that have become worried or
euphoric about the stock’s potential suddenly influence volume trading.
Exhaustion
In a rising or falling market, we can see exhaustion moves. These are generally sharp moves in
price combined with a sharp increase in volume, which signals the potential end of a trend.  We
will see a decrease in volume after the spike in these situations and a possible trend reversal.
The above basic guidelines can be used to assess market strength or weakness, as well as to
check if volume is confirming a price move or signaling that a reversal might be at hand.
Manually analysing the traded volume can help you decide the auto-trading strategy you can rely
on depending on the current market conditions.
Volume Indicators

Indicators based on volume are sometimes used to help in the decision process. In short, while
volume is not a precise tool, entry and exit signals can sometimes be identified by looking at
price action, volume, and a volume indicator.

1. On Balance Volume (OBV) – On Balance Volume (OBV) measures buying and selling pressure
as a cumulative indicator, adding volume on up days and subtracting it on down days. It is simply a
running total of positive and negative volumes. A period’s added volume is positive when the close is
above the prior close and is negative when the close is below the prior close.

OBV Chart

3
2. Volume Weighted Average Price (VWAP) – The Volume Weighted Average Price
(VWAP) is, as the name suggests, is the average price of a stock weighted by the total trading
volume. The volume weighted average price helps in comparing the current price of the stock to
a benchmark. When the price is above VWAP chartists prefer to initiate long positions. When
the price is below VWAP they may prefer to initiate short positions.

VWAP Chart

3. Money Flow Index (MFI) – Money Flow Index (MFI) is the technical indicator, which
indicates the rate at which money is invested into a security and then withdrawn from it.
construction and interpretation of the indicator is similar to Relative Strength Index with the only
difference that volume is important to MFI.

MFI Chart

4
4. Chaikin Accumulation/Distribution – Accumulation/Distribution Technical Indicator is
determined by the changes in price and volume. The volume acts as a weighting coefficient at
the change of price — the higher the coefficient (the volume) is the greater the contribution of
the price change (for this period of time) will be in the value of the indicator. It is a better version
of OBV. Rising A/D means accumulation/buying is prevalent in the market. Falling A/D means
distribution/selling is prevalent in the market. 

A/D Chart

On Balance Volume (OBV)

In the last article of our MasterClass on Volume Indicators, we talked about the essential
concepts of “volume” and the different ways in which volume is used to derive valuable insights
about the market sentiment. Checkout the last article if you haven’t already. In this article we’re
going to talk about one of the most popular volume indicators, the On Balance Volume or OBV.
We’re going the cover the following topics in detail with description on charts and
implementation on Mudrex Strategy Canvas wherever necessary:

1. Introduction to OBV
2. Calculation
3. Interpretations
4. Using the Volume Block on Mudrex
5. Making your own auto-trading bot

Introduction

On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator,
adding volume on up days and subtracting it on down days. It was one of the first indicators to
measure positive and negative volume flow. It is a technical trading momentum indicator that
uses volume flow to predict changes in stock price. Chartists believe that when volume increases

5
 sharply without a significant change in the stock’s price, the price will eventually jump upward
or fall downward.

OBV Chart

Just like price is to security, OBV is to volume. Magnitude of OBV has no physical meaning of
it’s own. Different securities have different ranges of traded volumes per day and the OBV of
two securities cannot be compared. The only useful interpretation of OBV is it’s overall trend i.e.
rising or falling.

Calculation 

The On Balance Volume (OBV) line is simply a running total of positive and negative volume.
A period’s volume is positive when the close is above the prior close and is negative when the
close is below the prior close.

 If the current closing price is above the prior close price then: 
Current OBV = Previous OBV + Current Volume

 If the current closing price is below the prior close price then: 
Current OBV = Previous OBV – Current Volume

 If the current closing price is equals the prior close price then: 
Current OBV = Previous OBV (no change)

It is basically the direct sum of volume bars at the bottom of the candlestick charts where green
bars are considered as positive volume whereas red bars are considered as negative volume.

6
 Interpretations

1. Trend Confirmation: Joe Granville, the creator of OBV, theorized that volume precedes price.
OBV rises when volume on up days outpaces volume on down days. OBV falls when volume on down
days is stronger. A rising OBV reflects positive volume pressure that can lead to higher prices.
Conversely, falling OBV reflects negative volume pressure that can foreshadow lower prices. 

2. Institutional Investors: The theory is that smart money or institutional investors can be seen
flowing into security by a rising OBV. When the public then moves into the security, both the security
and the On Balance Volume will surge ahead.

3. Trend Reversal: It is believed that OBV would often move before price. If OBV is rising while
prices are either flat or moving down, expect a trend reversal from downtrend to uptrend i.e. prices should
move higher. If OBV is falling while prices are either flat or moving up, a trend reversal from uptrend to
downtrend i.e. prices should move lower.

4. Divergences: A bullish divergence forms when OBV moves higher or forms a higher low even as
prices move lower or forge a lower low. A bearish divergence forms when OBV moves lower or forms a
lower low even as prices move higher or forge a higher high. The divergence between OBV and price
should alert chartists that a price reversal could be in the making.

5. Breakout: As price and volume keep on rising together, there seems to be no problem but a time
will come where we will see that price could not breach the previous top, but OBV line has breached the
previous top. This is called an advanced breakout. It shows that although the price has gone up marginally
volume generation is so high that OBV has made an advanced breakout. This is the signal which tells us
that the price will also cross the previous top.

All in all:

 a new high in the OBV indicates that buyers are stronger than sellers, and the price is likely
to increase.
 a new low in the OBV indicates that sellers are stronger than buyers, and the price is likely
to decrease
 when OBV increases or decreases in tandem with the price, the underlying trend is confirmed
 when OBV increases or decrease opposite to the price, the underlying trend is bound for
reversal

7
 Uptrend supported by falling OBV

Downtrend supported by falling OBV

Building on Mudrex

OBV is a simple summation and thus does not have any parameters of its own. Also, since the
absolute value of OBV does not have its own meaning, it cannot be used to make a trading
strategy of its own. Instead, traders like to take the moving averages of the OBV line (instead of
price line) and use them for trend confirmation or filtering false signals while generating buy/sell
signals from a different price-based indicator trading strategy.

8
OBV Indicator block on Mudrex looks like this:

You can use a compare value in place of 0123 in the range of the cryptocurrency’s traded
volume. However, comparison of OBV with a fixed value of traded volume isn’t much of a help.

Instead of this, we will be using the “Volume Block” on Mudrex for trend confirmation and false
signal filtering. For the sake of standardisation, we’ll be using look-back periods similar to that
of MACD (12, 26) for trend confirmation as shown:

Uptrend can be anticipated when Avg. vol of 12 candles is greater than Avg. vol of 26 candles:

Downtrend can be anticipated when Avg. vol of 12 candles is lesser than Avg. vol of 26 candles:

When the shorter MA volume is greater than the longer MA volume, only look for going long in
your price-based trading strategy. On the other hand, when the shorter MA volume is smaller
than the longer MA volume, only look for going short in your price-based trading strategy.

9
 A simple example of using the above for false signal filtering in a MACD Signal Line Crossover
strategy is as follows.

Buy when:

1. 12-Volume Avg. > 26-Volume Avg.

2. MACD Line crosses up Signal Line

Sell when:

3. 12-Volume Avg. < 26-Volume Avg.

4. MACD Line crosses down Signal Line

Overall strategy looks somewhat like this:

False Signal Filtering using On Balance Volume

his can be done with any trading strategy of your choice and tested on historical data by
performing backtests on Mudrex. By now, I hope you are convinced about the leading
powers of the OBV. Yes, OBV is an important leading indicator, able to precede the
price movements of a security/stock due to its predictive qualities. While lagging
indicators (RSI, Stochastic Oscillator, moving averages, Bollinger Bands, CCI etc.)
follow price movements and don’t have reliable predictive qualities, a leading indicator
like OBV is able to anticipate when major moves in the markets would occur.

A lot more interesting things can be done using other volume indicators available on
Mudrex. Next up, we’ll be talking about the Volume Weighted Average Price
(VWAP) indicator and building your own auto-trading bot using the same, only on
Mudrex.

10
11