Volume is nothing but the potential of the buy / sell trades traded on the market. Volume based technical analysis is considered of much importance in Forex. Traders strongly correlate the price movement of the currency pairs to the volume in which they get traded. Therefore, volume based technical indicators have been formed, which help the traders to track their trading decisions evaluating the volume of the trades. We will describe below four popular volume based indicators and their uses.
Developed by Joseph Granville in 1963, On-Balance volume indicator is the most preferred volume based indicator. This is a running method, which sums up volume to identify the positive & negative flow of cash in the trades. This theory goes by the basic assumption that “volumes override price”. If the currency market was “bullish” on a particular day, the volumes of that day are added in OBV. Similarly, for a “bearish” day, the volumes are deducted from OBV. OBV is not affected when the closing prices don’t change. OBV is mainly used to compare the volumes with the currency prices, thus identifying any diverging signal or confirmation.
Accumulation / Distribution
Larry Williams devised this indicator in 1972. This indicator tracks the demand & supply factors related to the currency pair. Accumulation denotes “Buying” and Distribution denotes “Selling”. This indicator is distinctive for it correlates the volume with the relation between the opening & closing currency prices. If closing prices are higher than the opening, A/D is termed to be “Positive” and if a closing price is lower than the opening, it is termed as “Negative”. Again, if closing prices are stable, the A/D remains “as-is”. This indicator may seem a kin of OBV method, but it does not add the whole volume as in OBV. The fraction of volume to be added or deducted is decided based on the range of prices on the trading day and their remoteness from the opening/closing prices.
This indicator was devised by Mark Chaikin and is also known as “Chaikin Money Flow” method. It bears high resemblance to the previous Accumulation / Distribution method. Yet it sets itself apart from the Accumulation / Distribution method, as it considers the mean currency price of the day, rather than the opening price. Traders, who don’t have details on the opening prices, prefer to go for this method than the Accumulation / Distribution. Hence, this is also termed as the “oscillating indicator” and the Accumulation / Distribution is termed as the “cumulative indicator”. Yet the trading signals and the rules remain similar to that of Accumulation / Distribution method.
Positive / Volume Index
Norman Fosback takes the credit for this indicator. This indicator goes largely by the idea of “trend”. It assumes that when the volumes rise upward, the unexpected crowd also participates in the market thus marking the volumes more prominent. If the volumes show a downside on a particular day, then it is understood that the crowd may show less prominence in the trading. If the PVI exceeds one year MA, then it is assumed that there are likely chances of upward trend in the trades. If the PVI is lesser than one year MA, the market may turn bearish.