How to use volume trading Strategy
Looking for the best volume trading strategy? Your hunt for the Holy Grail is over. With a win-rate of 77%, this can be one of the best Forex trading strategies that you’ll ever find on the internet… and it’s totally FREE.
With more than 30 years of trading experience combined, our team at Trading Strategy Guides has put together this step-by-step trading guide so you can take advantage of analyzing the strength of a trend based on volume activity.
The Forex market, like any other market, needs volume to move from one price level to another.
The Forex market is the largest and the most liquid market in the world, with 6 trillion dollars worth of transactions performed on a daily basis. If you can master volume analysis, a lot of new trading opportunities can emerge.
When we have a lot of activity and volume in the market, as a consequence, it produces volatility and big moves in the market. That’s really what most traders need in order to make a profit trading the Forex market or any other market be it stocks, bonds, or even cryptocurrencies.
While you can still make money even in tight range markets, most trading strategies need that extra volume and volatility to work.
What is Volume Indicator Forex
In the Forex market, we don’t have a centralized exchange of total volume because we’re trading over the counter. If we look at any trading platform like TradingView, they have a volume attached to their chart. But, since we don’t have a centralized exchange that volume is coming from the feed that TradingView uses. Each retail Forex broker will have its own aggregate trading volume.
We can see that the volume in the Forex market is segmented, which is the reason why we need to use our best volume indicator.
What is the Best Volume Indicator?
The best volume indicator used to read a volume in the Forex market is the Chaikin Money Flow indicator (CMF).
The Chaikin Money Flow indicator was developed by trading guru Marc Chaikin, who was coached by the most successful institutional investors in the world.
The reason the Chaikin Money Flow is the best volume and classical volume indicator is that it measures institutional accumulation-distribution.
Typically on a rally, the Chaikin volume indicator should be above the zero line. Conversely, on sell-offs, the Chaikin volume indicator should be below the zero line.
What is the Difference between Chaikin Money Flow and Standard Volume
The difference between the Chaikin Money Flow and the standard volume is the math underlying each indicator. Secondly, the trading volume analysis is quite different as well as how the trading signals are interpreted.
On the one hand, volume simply measures how much a given currency pair has traded over any given period of time. Volume is used to measure the strength and weakness of a trend. As a general rule, a strong trend should be accompanied by rising volume. At the same time, a sharp rise in volume can also signal the potential end of a trend.
How is The Chaikin Money Flow Calculated?
The Chaikin Money Flow uses exponential moving averages in its calculations.
The math behind this volume trading indicator is a bit complex, but it’s not required to really know all the ins and outs to use the CMF indicator successfully.
CMF = 21-day Average of the Daily Money Flow / 21-day Average of the Volume
- Money Flow Volume = Money Flow Multiplier x Volume for the Period
- Money Flow Multiplier = ((Close value — Low value) — (High value — Close value)) / (High value — Low value)
Basically, the indicator uses two exponentially weighted moving averages (EMAs) of the accumulation/distribution line. The accumulation/distribution line is similar to the one used by the MACD indicator.
Let’s see how to use the CMF indicator with the best settings.
What are the Best Settings for Chaikin Money Flow
The default setting for this volume indicator is 21-periods.
While you can tweak the indicator settings and you can try different configurations, you need to keep in mind 3 things:
- A large period number will not give you more accurate trade signals.
- Higher settings will make the volume indicator less sensitive to short-term changes in the price.
- On the other hand, lower settings will make the CMF indicator extremely sensitive to short-term price changes and subsequently more prone to give false signals.
See the trading volume chart below:
This makes CMF the best volume indicator for day trading.
Let’s examine the advantage of using a volume indicator.
Why you should Use the Chaikin Money Flow
The main advantage of the Chaikin Money Flow indicator is that the indicator can assess the buying pressure vs the selling pressure of your favorite currency pair (stock, ETF, cryptocurrency, futures market, etc.). Since we don’t have an aggregated volume in the foreign exchange market, this indicator is coming to the rescue.
With the CMF volume indicator, we can measure the amount of money coming into the market and its impact on the actual price.
When the candle closes near the top of its price range on increase CMF volume, it’s a signal that smart money is accumulating. On the other hand, if the candle closes near the bottom of its price range on decreased CMF volume, it’s a signal that distribution is taking place.
Let’s see how 5 different ways you can use volume in trading:
How to Use Volume in Trading for Better Results
The CMF volume indicator can be used to confirm the strength of the trend, the accuracy of a breakout, trend reversals, false breakouts and so much more. Gaining an understanding of the different applications of the volume indicator in trading can help you improve your results.
Without further ado, here are a couple of ways to use price-volume analysis.
How to Use Volume for Trend Strength Confirmation
Here is how to use the CMF volume indicator to determine the strength or weakness of a trend:
- When the CMF volume readings are above the zero level, it reveals a buying pressure and the fact that we’re in an uptrend. The higher the volume reading is the stronger the trend is.
- When the CMF volume readings are below the zero level, it reveals selling pressure and the fact that we’re in an uptrend. The lower the volume reading is the weaker the trend is.
How to Use Volume to Confirm Breakouts
The Chaikin Money Flow indicator can also be used to confirm the strength of a breakout. If the CMF volume reading is above zero when we break a resistance that is viewed as buying pressure. In this case, the breakout has higher chances of success.
Conversely, if the CMF volume reading is below zero when we break a support level that is viewed as selling pressure. In this case, the breakout has higher chances of success.
How to Use Volume to Confirm False Breakouts
We can also use the CMF volume readings to spot false breakout signals. If we break above resistance but we have negative readings on the CMF indicator that is a potential false breakout.
Conversely, if we break below a support level but we have positive readings on the CMF indicator that is a potential false signal.
How to Use Volume for Buy and Sell Signals
The crossing of the zero level can be used to generate buy and sell signals.
Put it simply, when the CMF volume forex indicator crosses above zero, it’s seen as a buy signal. Conversely, when the CMF volume indicator crosses below zero, it’s seen as a sell signal.
Note* It should be avoided to use this type of trading signals in ranging markets.
How to trade Volume Spikes
Usually, in both rising and falling markets during the last stage of the trend, we can see spikes in volume and volatility. These are often sharp price moves that are accompanied by sharp increase/decrease in trading volume.
When you see this type of action, it’s a warning sign of a potential trend reversal.
Let’s go over an effective volume trading strategy with buy and sell signals, stop loss and take profit levels to trade in both bull and bear markets.
Volume Trading Strategy
This volume trading strategy uses two very powerful techniques that you won’t see written anywhere else. These are trade secrets that you wish you had been taught.
The Chaikin indicator will dramatically improve your timing and teach you how to trade defensively. Having a good defence when trading is absolutely critical to keep the profits that you’ve earned.
Before we go any further, we always recommend taking a piece of paper and a pen and take notes of the rules of this entry method. You can also read a million USD forex strategy.
In this article, we’re going to look at the buy-side.
What is The Importance of Buying Volume and Selling Volume
Volume trading requires you to pay careful attention to the forces of supply in demand.
Volume traders will look for instances of increased buying or selling orders. They also pay attention to current price trends and potential price movements.
Generally, increased trading volume will lean heavily towards buy orders. These positive volume trends will prompt traders to open a new position.
On the other hand, if the cash flow and trading volumes decrease — we see a “bearish divergence”, meaning that it will likely be an appropriate time to sell.
You also need to pay attention to the relative volume — regardless of the raw number of transactions occurring in a trading period. Ask yourself how is the prospective asset performing relative to what was expected?
By learning how to use the Chaikin money flow and other relevant indicators, you will easily be able to identify whether the buyer or the seller is currently “in control.”
With practice, volume trading strategies can yield wins for your portfolio 77% of the time!
Step #1: Chaikin Volume Indicator must shoot up in a straight line from below zero (minimum -0.15) to above the zero line (minimum +0.15).
When the Volume goes from negative to positive in a strong fashion way it has the potential to signal strong institutional buying power. That’s our base heavy lifting signal!
Basically, we let the market reveal its intentions to us.
When big money steps into the market, they leave a mark as their orders are so big that it’s impossible to hide. When the volume indicator Forex goes straight from below zero to above the zero line and beyond, it shows accumulation by smart money.
We’re a firm believer that you get the maximum bang for your buck when you trade side by side with smart money. Chances are that institutions have more money and more resources at their disposal. Odds can be stacked against you, so if you want to change that, just follow the smart money.
There is one more condition that needs to be satisfied to confirm a trade entry.
Step #2: Wait for the Volume Indicator Forex to slowly pullback below the zero line. The price needs to remain above the previous swing low.
Once we spot the elephant in the room, aka the institutional players, we start to look for the first sign of market weakness. Here is how to identify the right swing to boost your profit.
We’re going to let the Chaikin Money Flow indicator slowly drop below the zero line. The keyword here is “slowly”. We don’t want to see the volume dropping fast because this will invalidate the accumulation noted previously.
Second, as the volume decreases and drops below the zero level, we want to make sure the price remains above the previous swing low. This will confirm the smart money accumulation.
The Volume strategy satisfies all the required trading conditions, which means that we can move forward and outline what is the trigger condition for our entry strategy.
Step #3: Buy once the Chaikin Forex indicator breaks back above the zero line. Wait for the candle to close before pulling the trigger.
Now that we have observed real institutional money coming into the market, we wait for them to step back in and drive the market back up.
When the Chaikin indicator breaks back above zero, it signals an imminent rally as the smart money is trying to markup the price again.
We would need to wait for the candle close to confirm the Chaikin break above the zero line. Once everything aligns, we’re free to open our long position. Here is an example of a master candle setup.
*Note: The trigger candle needs to have the closing price in the upper 25%.
This brings us to the next important step. We need to establish the Chaikin trading strategy which is finding where to place our protective stop loss.
Step #4: Hide your protective Stop Loss under the previous pullback low
Using a stop loss is crucial if you want to have an idea of how much you’re about to lose on your trade. Never underestimate the power of placing a stop loss as it can be lifesaving.
Simply hide your protective stop loss under the previous pullback’s low. Never use a mental stop loss, and always commit an SL right the moment you open your trades.
Trading with a tight stop loss can give you the opportunity to not just have a better risk to reward ratio, but also to trade a bigger lot size.
Last but not least, we also need to learn how to maximize the profits with the Chaikin trading strategy.
Step #5: Take profit when the Chaikin Volume drops below -0.15
Once the Chaikin volume drops back below -0.15, it indicates that the sellers are stepping in and we want to take profits. We don’t want to risk giving back some of the profits gained so we liquidate our position at the first sign of the smart money stepping in on the other side of the market.
We always can get back into the market later if the smart money buyers show up again.
**Note: The above was an example of a BUY trade using the best volume indicator. Use the same rules for a SELL trade — but in reverse. In the figure below, you can see an actual SELL trade example.
Conclusion — Best Volume Indicator
The Volume Trading Strategy will continue to work in the future because it’s based on how the markets move up and down. Any market moves from an accumulation (distribution) or base to a breakout and so forth. This is how the markets have been moving for over 100 years.
Smart money always seeks to mask their trading activities, but their footprints are still visible. We can read those marks by using the proper tools. Here is another strategy on how to apply technical analysis step by step.
Make sure you follow this step-by-step guide to properly read the Forex volume. The Chaikin indicator will add additional value to your trading because you now have a window into the volume activity the same way you have when you trade stocks.
Thank you for reading!
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