MACD Compared with Several Volume Indicator Categories
Older technical
analysis books will state that Price is the most important aspect of a stock
chart. However, most were written at a time when Volume aka Quantity data was
either unavailable or unreliable. With a fully automated Stock Market and
streaming data feeds, Volume is now just as important as Price.
Without Volume,
traders are missing half of the crucial data available for each trade.
Just like Price,
there are many categories of Volume aka Quantity Indicators. To fully analyze a
stock chart in order to see Volume Indicators lead Price, several different
types of Volume Indicators should be incorporated into your analysis along with
favorite indicators for Price.
Keep in mind that
every indicator works ideally in a specific market. MACD is best when the
market is Moderately Trending Up. Extensive studies of MACD have proven over
many various analysis that MACD is an upside indicator. It is often used for
selling short but underperforms other price indicators, due to the fact it was
first designed for a market that was moving with momentum out of a long-term
bottom. The entire formula intent was for finding momentum when the market
moved up.
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Volume Indicators
work as well on both sides of the market, however certain tweaking of the settings
and periods are necessary for a down trending market as fewer Market Participant
Groups actually sell short. So keep that in mind as you set up Volume
Indicators.
Since Volume
Indicators lead Price and there are several categories to consider, below is a
list with explanations:
1. Quantity
Indicators tell you the strength or quality of the current price action, even
if price is in a very tight range. In fact when price is very tight and small,
Volume is the only indicator that will lead.
2. Volume Oscillators
like ChiOsc function differently than Price and Time Oscillators, which are
designed to reveal overbought/oversold price conditions during a Trading Range
Market Condition. Volume Oscillators reveal quiet accumulation, rotation,
extreme volume surges, and insipid volume that precede whipsaw price action and
weaker candles. Most Volume Oscillators are center line oscillators and take a
bit of getting used to, for traders who have never used a Volume Oscillator
before. There are numerous Volume Oscillator patterns to learn.
3. Money Flow Index
MFI or Flow of Funds into or out of a stock reveals rotation or distribution
and can indicate Dark Pool activity. These are Institutions lowering their
percentage of held shares over time, especially the giant Buy Side Institutions
who control vast quantities of stock.
4.
Accumulation/Distribution Indicators are also Volume based, but include Price
as well making them a Hybrid Indicator when used with a subordinate indicator.
These tend to lead price sooner and with more emphasis.
5. Comparative Volume
Indicators are usually comparing Price and Volume patterns, but may also
compare different Volume Indicators.
The chart example
below has multiple indicator windows, which show that all the Volume based
indicators lead Price. For indicator comparison I have added Relative Strength
Index RSI and MACD to the chart indicator windows, which show they lag behind
Price.
The chart below is
provided without the gold frame for easier Indicator comparison viewing:
For this stock example the importance of entering sooner is emphasized, as this stock suddenly gaps and runs. Being able to read leading indicators properly is most important, rather than chasing after a run. Technical Traders who are planning a career in trading need to learn Volume Indicators, how and when to use which type, and how to interpret the various patterns each provides.
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There is also a the
Library with Training Webinars for StockCharts.com chart users. That
charting software was used to provided the chart example in this
article. Go learn more about those charts and indicators.
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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
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