Description:
Net volume in technical analysis refers to the calculation derived from subtracting the volume of shares traded at the bid price from those traded at the ask price. This metric provides insights into the prevailing buying or selling pressure in the market. A positive net volume suggests more buying pressure, indicating that more shares were traded at the ask price compared to the bid price, while a negative net volume implies more selling pressure, indicating the opposite. Integrating net volume analysis with other technical indicators enriches trading decisions, although prudent consideration of broader market conditions remains essential.
Input Parameters:
- Price Source: The specific data points (such as open, high, low, or close) from each candle in a financial chart that an indicator uses for mathematical computations, enabling the calculation of metrics like the average over a specified period.
Use Cases:
- Confirmation of Trends: Net volume can be employed to confirm the strength of trends observed in price movements. For instance, in an uptrend, if prices are rising accompanied by positive net volume, it reinforces the bullish momentum, suggesting a higher probability of the trend continuation. Conversely, in a downtrend, if prices are declining with negative net volume, it confirms the bearish sentiment, indicating potential further downside.
- Identification of Reversals: Net volume analysis can assist traders in identifying potential trend reversals. Divergence between price movements and net volume may signal weakening momentum and impending reversals. For example, if prices are making higher highs, but net volume is decreasing or turning negative, it could indicate weakening bullish pressure and foreshadow a possible trend reversal to the downside.
- Confirmation of Breakouts: Net volume can also be used to confirm the validity of breakouts from key support or resistance levels. When prices break above resistance levels with increasing positive net volume, it suggests strong buying interest and validates the breakout, potentially leading to further upward movement. Conversely, if prices break below support levels with increasing negative net volume, it confirms the breakout to the downside, indicating potential further downward movement.
This feature can be used in:
- Market Scanner
- Strategy Tester
- Multi-Factor Alerts
- Smart Checklist
Do you want to learn more about other volume indicators? Check out our blogpost.