Unlocking the Power of Volume: Combining Volume with TA

In our previous blog posts, we explored the importance of volume analysis in understanding indicators that can be used for volume analysis. Today, we'll delve deeper into how combining volume analysis with technical analysis can provide valuable insights for traders and investors alike. We will do so by laying out a strategy that anyone can use that will utilize volume.

The Significance of Volume in Technical Analysis
We have previously discussed how volume plays a crucial role in technical analysis. It is essential to examine volume patterns alongside price action, as it helps traders determine liquidity and identify potential trading opportunities. When combined with technical indicators, volume offers a more comprehensive view of market activity and can enhance decision-making in trading.

Indicators to Combine with Volume Analysis
Here are some popular technical indicators that traders can use in conjunction with volume analysis:

1. Moving Averages
Moving averages (MAs) are one of the most widely used technical indicators, as they help traders identify trends and potential support and resistance levels. The two most commonly used moving averages are simple moving averages (SMA) and exponential moving averages (EMA). We'll use a short-term EMA (e.g., 9-day EMA) and a long-term EMA (e.g., 21-day EMA) for a strategy later in this post.

2. Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100, with readings below 30 indicating oversold conditions and readings above 70 indicating overbought conditions. The RSI can help traders identify potential trend reversals and entry/exit points.

The Strategy That Incorporates Volume

1. Identify Trend Direction
First, apply the 9-day EMA(shown in white) and the 21-day EMA(shown in purple) to your price chart. The trend direction is determined by the relationship between the two moving averages:

Uptrend: The 9-day EMA is above the 21-day EMA
Downtrend: The 9-day EMA is below the 21-day EMA
Sideways: The moving averages are intertwined, with no clear direction


2. Confirm Trend Strength with RSI
Apply the RSI to your chart, and use the 30 and 70 levels as reference points:
For uptrends, look for the RSI to stay above 30 and preferably above 50.
For downtrends, look for the RSI to stay below 70 and preferably below 50.

3. Analyze Trading Volume
Compare the volume levels during the trend to the average volume over a specific period of your choosing using your desired volume indicator (see previous post on volume indicators). If the volume is above average during the trend or is rising, it confirms its strength. Conversely, a decreasing volume may signal a weakening trend or a potential reversal.

4. Entry and Exit Points
Long Entry: In an uptrend, look for the RSI to pull back below 50, and then cross back above it. Confirm the entry with increasing trading volume. This indicates a potential buying opportunity.
Short Entry: In a downtrend, look for the RSI to pull back above 50 and then cross back below it. Confirm the entry with increasing trading volume. This indicates a potential selling opportunity.
Exit Points: Use the moving averages as trailing stop-loss levels. For long positions, exit when the 9-day EMA crosses below the 21-day EMA. For short positions, exit when the 9-day EMA crosses above the 21-day EMA.

Practical Tips for Combining Volume with Technical Analysis
Here are some practical tips for effectively integrating volume analysis with technical indicators:

1. Use Multiple Timeframes
Analyze volume patterns and technical indicators across different timeframes to identify potential trends and reversals more accurately. We always recommend a top-down time frame approach, starting at higher time frames and working down to your desired time frame for entries.

2. Look for Volume Confirmation
When a technical indicator signals a potential trading opportunity, confirm it with volume analysis to ensure the move is supported by strong market activity.

3. Monitor Divergences
Divergences between volume and price action can signal potential trend reversals or continuations. Keep an eye on these discrepancies to make informed trading decisions.

Conclusion:
Combining volume analysis with technical indicators can help traders and investors make more informed decisions about market trends and potential trading opportunities. By understanding the relationship between volume and price action and incorporating this knowledge with technical analysis, traders can unlock powerful insights and enhance their overall trading strategy.