Volume spread analysis is a school of thought that believes volume plays a crucial role in understanding moves of prices in financial markets. This text will highlight 5 core arguments that solidify this basic premise.
1- Technical analysis is not enough.
An argument in favor of technical analysis is the idea that the securities’ prices may not be linked to their fundamentals. The behavior of financial markets is frequently a result of momentum, confidence, and sentiment. In this sense, traders analyze security price chart to know what is the upside and downside potential.
However, reading the market solely from prices is insufficient. Markets move on supply and demand, and so, volumes are also an important part of the equation.
Volume Spread Analysis is a good way to understand how the concepts of supply and demand influence prices. It allows spotting imbalances between buyers and sellers by looking at prices and volumes.
VSA helps traders understand what the major players are doing and benefit from their actions. When a small trader buys or sells a pair, he/she certainly will not influence the price. However, when a big bank trades millions of a certain currency, this will probably move the market up or down. Usually, these big traders have more information and knowledge about the markets, so it is wise to be on their side. Through volume analysis, traders can know if market makers are buying or selling and take advantage of their positions.
2- It’s all about perceived value.
Fundamental analysis states that we can always grasp the intrinsic value of a financial instrument – stocks, currencies, commodities, etc. An assessment of the economy would allow traders to explain oscillations in prices.
On the contrary, volume-based traders say that to fully know what goes on in the markets, we should rely on perceived values instead of intrinsic value. And what does perceived value mean? This is how different professional traders view a financial instrument. And this is always contextual and acquired through an analysis of volume.
Below you can find the evolution of the price to book value since 2000 of the S&P 500. This metric is considered an approximation of the perceived value. It’s possible to see how traders permanently evaluate companies above their book value, taking in mind other analysis besides the fundamental one.
3- Price and volume are inter-related.
Past prices are an important aspect to understand moves in financial markets. However, the analysis of price is not enough.
A lot of technical analysis theories say we can solely rely on the analysis of price to understand the next move. These can take the form of different theories: Dow theory, Elliot wave theory, harmonic theory, candle-based trade, etc. The bottom line for all these traders is that everything is reflected in prices and different patterns.
Volume spread analysts say that the analysis of price is incomplete. We need to understand where the money is and where it will be in the future. Only then we can try to predict what is going to happen in the markets.
4- The cause of moves is volume.
We already dismissed fundamental and technical analysis as the sole explanations for moves in financial markets. Now, let’s look at how volume spread analysts justify these moves.
In their opinion, we need to look at prices in relation to volume. It is only this interconnection between price action and volume that justifies moves in financial markets.
In the chart below you can observe how major moves in prices or price reversions were always accompanied by volumes higher than normal. An analysis of volume in this situation would help traders identify these movements of prices.
5 – It’s all about understanding the role of different traders in the market.
The 5th core idea is that different kinds of traders carry different sorts of information – and we can base our trading strategy on this idea.
Volume spread analysis tends to emphasize three different types of traders: retail, commercial and professional. Retail traders are those who have small accounts and tend to trade erratically. They do not have any particular trading strategy and traditionally tend to buy and sell when the uptrend/downtrend is exhausted.
Commercial traders are investment banks whose function is to place orders in the market to satisfy clients’ needs. They can also function as market makers. These traders have an impact because they often carry large orders, which usually cause volatility. However, they don’t have any strong rationale supporting their trading decisions.
Professional traders are large traders that are in the game to win, and they are behind most trends. These are the types of traders that volume spread analysis tends to be concerned with – the successful volume trader is the one that detects what these traders are doing.
The following chart illustrates the power of large traders in moving the markets. On the left side, large traders reduced their positions, which caused a downside movement in prices. Prices traded sideways while these traders had stable positions and, when they started buying, prices moved upside. A small trader aware of what large traders were doing could follow their steps and take advantage of this information.
Wish to know more? Learn more about volume spread analysis in this article.
The pivot points indicator is a key tool for Forex traders. It helps them find out the market direction, set support and resistance levels, and pick the right times to open and close trades. This article will provide a comprehensive guide to the pivot points indicator, covering its calculation methods, types, a pivot points strategy, a pivot points indicator for Metatrader (MT4), as well as its drawbacks. By understanding how to effectively use this indicator, traders can enhance their trading decisions and improve their overall success in the Forex market.
What is a Pivot Point Indicator?
The pivot points indicator is a technical analysis tool used to forecast market direction, support and resistance levels, and potential entry and exit points for trades. It is calculated based on the previous day’s high, low, and close prices and is widely used by day traders in various financial markets, including forex, commodities, and equities.
Calculation Methods for Pivot Points
There are several calculation methods for pivot points, including the standard method, Fibonacci method, Woodie’s method, Camarilla method, and Demark method. Each method has its own formula for calculating pivot point levels and offers unique insights into market trends and potential price levels.
Standard Pivot Points
The standard pivot points method is the most common calculation method. It uses the previous day’s high, low, and close prices to determine the pivot point level, as well as support and resistance levels:
P = (High + Close + Low) / 3
S1 = 2*P – High
R1 = 2*P – Low
S2 = P – (High – Low)
R2 = P + (High – Low)
S3 = Low – 2(High – P)
R3 = High + 2(P – Low)
Fibonacci Pivot Points
The Fibonacci method incorporates Fibonacci retracement levels into the calculation of pivot points. It uses the previous day’s high, low, and close prices to calculate pivot point levels that correspond to Fibonacci levels such as 38.2%, 61.8%, and 100% (P is the same as the standard Pivots):
P = (High + Close + Low) / 3
R1 = P + 0.382 * (High – Low)
R2 = P + 0.618 * (High – Low)
R3 = P + 1 * (High – Low)
S1 = P – 0.382 * (High – Low)
S2 = P – 0.618 * (High – Low)
S3 = P – 1 * (High – Low)
Woodie’s Pivot Points
Woodie’s method gives more weight to the closing price in the calculation of pivot points. It uses the previous day’s high, low, and close prices to determine pivot point levels as well, which are then used to calculate support and resistance levels:
P = (High + Low + 2 * Close) / 4
R1 = 2*P – Low
R2 = P + (High – Low)
S1 = 2*P – High
S2 = P – (High + Low)
Camarilla Pivot Points
The Camarilla method calculates pivot point levels that are closer to the current price compared to other methods, whereas P has the same formula as the standard one:
P = (High + Close + Low) / 3
R1 = Close + (High – Low*1.0833
R2 = Close + (High – Low)*1.1666
R3 = Close + (High – Low)*1.2500
R4 = Close + (High – Low)*1.5000
S1 = Close – (High – Low)*1.0833
S2 = Close – (High -Low)*1.1666
S3 = Close – (High -Low)*1.2500
S4 = Close – (High-Low)*1.5000
Demark Pivot Points
Demark method uses the relationship between the opening and close prices to calculate pivot point levels. It uses different formulas depending on whether the close price is greater than, less than, or equal to the opening price:
The close price is lower than the opening price:
Reference = High + 2*Low + Close
The close price is greater than the opening price:
Reference = 2*High + Low + Close
The close price is equal to the open price:
Reference = High + Low + 2*Close
Once the reference value is calculated, you can calculate P, S1, and R1 in the following way:
P = Reference / 4
S1 = Reference / 2 – High
R2 = Reference / 2 – Low
Using Pivot Points in Forex Trading
The pivot points indicator can be used in various ways to enhance forex trading decisions. It can help identify market trends, determine support and resistance levels, suggest entry and exit points for trades, and identify potential trade areas.
Identifying Market Trends
By analyzing the asset price relative to the pivot point level, traders can determine the overall market trend. If the price is above the pivot point level, it indicates a bullish trend, while a price below the pivot point level suggests a bearish trend.
Support and Resistance Levels
Pivot points act as important support and resistance levels. When the price approaches these levels, traders can anticipate potential bounces or breaks. Support levels can be used as entry points for long trades, while resistance levels can be used as entry points for short trades.
Entry and Exit Points for Trades
Traders can use pivot points to determine entry and exit points for their trades. If the price hits a support level, it could indicate an opportunity to initiate a long trade. Conversely, when the price reaches a resistance level, it may be a signal to enter a short trade.
Potential Trade Areas
If the asset price breaks through a pivot level, the next pivot point may be considered as a potential spot for taking profits. Breakouts above pivot points indicate strength, while breakouts below pivot points indicate weakness.
Pivot Point Trading Strategies
There are several trading strategies that can be used with pivot points, including the pivot point candlesticks strategy, pivot points intraday trading, pivot points in forex, and pivot points in other markets. Each strategy utilizes pivot points in unique ways to make trading decisions.
Pivot Points Intraday Trading
Intraday traders often use pivot points to identify potential bounce or breakout trading opportunities. They can enter trades when the price bounces off a support level or breaks through a resistance level. Stop-loss orders can be placed to limit potential losses.
Pivot Points in Forex
Forex traders can use pivot points to identify potential support and resistance levels for currency pairs. By analyzing how the price interacts with these levels, traders can make informed decisions on entry and exit points for their forex trades.
Pivot Points in Other Markets
Pivot points can also be used in other financial markets, such as commodities and indices. Traders can apply pivot point strategies to identify potential support and resistance levels in these markets, enhancing their trading decisions.
Benefits of Using Pivot Points
Using pivot points offers a few benefits for Forex traders, such as:
- Easy Trend Identification: Pivot points provide a simple way to identify market trends. Traders can determine if the market is bullish or bearish based on the price’s position relative to the pivot point level.
- Reliability: Pivot points have been proven to provide reliable information for trading decisions, especially when combined with other technical indicators. Because many traders use pivot points, it’s more likely that the price will react to these levels.
Drawbacks of Using Pivot Points
While pivot points are valuable indicators, they have some drawbacks: pivot points may not be as useful for traders who only trade for short periods within a day. The price may not reach or react to the levels established by the pivot points indicator. Additionally, pivot points calculated based on daily data may not be as relevant for traders who only focus on specific trading sessions.
What is the best indicator for pivot points?
The best indicator for pivot points depends on the trader’s preferences, trading style, and the specific market being traded. The article provides several calculation methods for pivot points, including the standard method, Fibonacci method, Woodie’s method, Camarilla method, and Demark method. Each method has its own characteristics and offers unique insights into market trends.
Some traders may prefer the simplicity and widespread use of the standard method, while others may find value in incorporating Fibonacci retracement levels or giving more weight to the close price with Woodie’s method. The choice of the best indicator ultimately comes down to the trader’s personal preference and their understanding of how each method aligns with their trading goals and strategies.
It is recommended for traders to experiment with different methods, observe how they perform in their trading scenarios, and choose the one that provides them with the most reliable and actionable information for their decision-making process. Additionally, combining pivot points with other technical indicators and analysis tools can further enhance the accuracy and effectiveness of trading strategies.
How accurate is pivot points indicator?
Pivot points are widely used by traders and have proven to be effective in identifying support and resistance levels, potential entry and exit points, and market trends. However, like any technical indicator, pivot points should be used in conjunction with other analysis tools and indicators to make informed trading decisions. Traders should also consider market dynamics, news events, and other factors that may impact price movements.
The pivot points indicator is a powerful tool for forex traders, providing insights into market trends, support and resistance levels, and potential entry and exit points for trades. By mastering pivot points and implementing effective trading strategies, traders can improve their decision-making process and enhance their success in the forex market. Remember to combine pivot points with other technical indicators for more accurate and reliable trading signals.
Download a Pivot Points Indicator for Metatrader (MT4)
You can download AT – Pivots indicator for free for your Metatrader 4 here:
- Auto-optimizes for maximum profit/loss/li>
- Shows total profit/loss and pips/day
- Multi-timeframe panel
- Alerts when the trend shifts up or down
Just like all of our other premium indicators, you can try it out on your Metatrader using our demo.
The average daily range (ADR) is an indicator that shows you the historical average of each day’s range (high – low). In this article, we will cover:
- How to calculate the average daily range
- How to use the average daily range in your Forex trading
- Average vs confidence values
- Why confidence values are important and how to use them
- A free average daily range indicator for Metatrader 4 (MT4)
- The distinction between Average Daily Range (ADR) vs Average True Range (ATR)
How to calculate the average daily range?
The ADR is calculated by simply summing the daily ranges (a daily range is the difference between the day’s high and low) and dividing it by a certain number of days, thereby averaging out the daily range over this time period. Typically, 21 days or 30 days are used as the ADR’s period in an ADR indicator.
How to use the average daily range in your Forex trading
This indicator can be used to gauge the volatility and to decide whether to trade a pair or sit out on the sidelines.
When today’s range gets to a value near the average range – for example, if the average is 100 pips, and today’s range is already at 90 pips – it might be wise to consider not trading the pair any longer for the day and instead look for opportunities in other pairs, as it already reached the historical volatility.
But let’s say that you’ve found the setup you were looking for, yet the daily range is already close to its average! So as not to miss a potentially lucrative opportunity, there is another value you should look at in these situations – the confidence levels.
Average vs confidence level
So what is a confidence level, and how does it relate to the average?
A confidence level of 90% with the value of 200 pips for example, means that 90% of the times, the daily range will be below 200 pips. In other words, the daily range will be at most 200 pips with a 90% confidence.
Typically, the 70% confidence level and above will be a higher value than the average. Whereas, the 50% confidence level is called the median, and typically it’s fairly close to the average as long as the averaging period is long enough. In certain situations it can deviate significantly from the average though (especially when there have been recent highly volatile days), so it’s good to keep an eye on both the average and these confidence levels.
How to use the confidence levels
You can use a confidence level of 75% to 90% instead of the average in those situations where you have a good reason to believe the pair still has room to trend, such as in days when:
- There was a news event with a major impact
- Prices broke an important Support/Resistance
- The pair has been on a strong trend for the last few days
In these situations, the average might not be a good “bet” on where the day’s range will reach, and so, using a high confidence level could make more sense.
Average daily range (ADR) vs Average true range (ATR)
These two terms may sometimes generate confusion, but they are distinct indicators that measure different things:
Average daily range (ADR) – average of the daily range (range = high – low).
Average true range (ATR) – the average bar’s “range” (range = high – low). So the difference is that unlike the daily range, it may use other timeframes other than the daily one. So we can speak of the ATR of EUR/USD 15 minutes timeframe, or the 1-hour timeframe for example.
On that note, the ATR of daily timeframe, would be a very close (or equal) value to the ADR.
Why not exactly equal? Because the ATR also takes into account price gaps. So unlike the ADR, it does not average over ranges, it averages over true ranges.
What is the true range?
For example, if yesterday’s high was 1.0500, but on the next day the low/high were at 1.0600/1.0700 respectively, there would be a gap between the two bars. And so instead of calculating today’s range as simply the high – low:
Range = 1.0700 – 1.0600 = 100 pips
You would use the previous day’s high instead:
True range = 1.0700 – 1.0500 = 200 pips
This way, the volatility between different bars is also taken into account, and for that reason, there is typically a small difference between the average range and average true range.
Get a free average daily range (ADR) indicator for Metatrader 4 (MT4)
We have a free average daily range indicator available, called AT – Daily Range, that also includes the confidence levels mentioned above. Along with showing all these values, it conveniently plots the expected daily high and low based on the average.
We recently launched our AT- Daily Range indicator! AT – Daily Range for MT4 (Metatrader 4), also called Average Daily Range (ADR) indicator, is a fundamental tool for day traders that calculates the average daily range, along with chosen confidence levels, so that you can better estimate the daily volatility. It also shows the expected top and bottom price based on this average range.
- Shows the average daily range along with the completed %
- Pinpoints the current day’s range in % to the average
- Shows the 75% and 90% daily range confidence levels (customizable)
- Plots the expected daily range directly on the chart
Download the indicator here for FREE, along with our other 5 freemium indicators.
- Draws supports/resistances automatically (short, mid and long-term)
- Shows the risk:reward based on these in order for you to better plan your trades
- Alerts when price is nearby, on break-outs and when a new S/R is formed
- Former supports turn into resistances on break-out and vice-versa
Just like all of our other premium indicators, you can try it out on your Metatrader using our demo.
If you wish to know more about the importance of supports/resistances and how to use them, check out this supports/resistances indicator guide.
If you want an indicator to draw these supports/resistances automatically and warn of your these critical price areas, take advantage of our 30% black friday promotion with the coupon ‘BlackFriday2022’ while it lasts!
Setup: Dynamic Trend Up
Order: Long Market Order (1.3150)
Initial Risk:Reward: 2.01
In this setup we use the dynamic trend indicator, also integrated in the alerts indicator. We aim to benefit from the immediate imbalance of supply and demand, and enter when the short-term trend is on our side.
The long trade was opened at 1.3150 and closed at 1.3188 (take-profit hit).
Trend (short-term): UP
Market Background (mid-term): STRONG
Support (nearest): 1.2979
Resistance (nearest): 1.3144
Next Event: Empire State Manufacturing Index (1h 29m)
Next High Impact Event: CPI y/y (1d 21h 29m)
Volatility: AVERAGE (-6% avg.)
Daily Range (Expected): 1.3030 – 1.3112 / 51% of avg. daily range Completed