Understanding Volume Indicators - Part 3
Hello everyone, hope you all are doing good? I'm back with the Part 3 and Final Part of this amazing series, Understanding Volume Indicators. If you haven't read the Part 1 and Part 2, I strongly suggest you that by clicking here for Part 1 and here for Part 2. In today's article, I will be looking at how does the volume reflect the evolution of prices in the charts & why does the volume sometimes anticipate the price and to know if it is better to use the volume indicator alone or use it in parallel with another indicator when trading.
Volume always reflect the evolution of prices in the chart because, volume reflects the activities of buyers and sellers of the assets and the price of the assets is determined by the buyers and sellers of the assets, hence, when volume of an asset changes, it will definitely have some effect on the price of the asset.
Whenever we see an increase in the volume of an asset, it shows that traders are either buying more or selling the asset. So, whenever we see a huge pump and dump of an asset, you will notice a very high volume and that's how volume reflect the evolution of prices in the chart. Look at the image below for more understanding.
Why Does Volume Sometimes Anticipate The Price
It is quite simple that volume will sometimes anticipate the price. In that sense, you will notice an increase in the volume of the asset before a sudden big pump or dump. But why does it happen this way?
Most of the times, it is because of the news related to the asset. When traders get the news, they rush in, to trade the asset, which will lead to increase in the volume of the asset. If the news is positive, after the increase in the volume, you will notice a big pump in the price of the asset and vice versa. Next time, you get a news of an asset you are holding, and see an increase in the volume of the asset, ensure you seize your opportunity.
Is it better to use the volume indicator alone or use it in parallel with another indicator when trading?
Volume indicator is a very good indicator that almost every trader should be making use of. But for me, I don't think it should be used alone, you need one or two other indicators to confirm it's signals, in order to get rid or reduce the chances of getting false signals.
For this article, I will be suggesting using Moving Average indicator along side the Volume indicator, as they will be working perfectly well together.
Whenever you see the moving average below the price and notice an increase in the volume of the asset, that's a good buy signal. And also if you see the moving average above the price and notice an increase in the volume of the asset, that's a good sell signal. Look at the image below for more understanding.
