The Directional Volume Indicator shows the trend’s direction by plotting volume bars. In this guide, we’ll talk about what the indicator is and its trading strategy.
What is the Directional Volume Indicator?
The Directional Volume comes from the oscillators’ family and helps find the trend’s direction. It uses volatility and volume periods to plot bars. These bars oscillate between the positive and the negative territory.
Like many other oscillators, the zero line is the most important aspect of the Directional Volume Indicator. Bars crossing above or below the zero line signal the trend’s direction.
Directional Volume Indicator Strategy
There are two ways to trade with the indicator; zero-line crossovers and divergences.
As mentioned above, the indicator moves above and below the zero line. Generally, there is strong buying pressure when the indicator is positive, and when the indicator is negative, there is more selling pressure. So you can take your positions accordingly.
The other way to trade with the Directional Volume Indicator is to look for divergences. A bullish divergence occurs when the price makes new lows while the Directional Volume makes a higher low. This higher low indicates that there is less selling pressure.
On the other hand, when the price advances to a new high and the Directional Volume fails to confirm this higher high, a bearish divergence occurs. This failure signals less buying pressure.
You also combine the divergence and the zero-line crossovers. If the bars slip into negative territory and there is a bearish divergence, it can be a potential short entry. Conversely, if the indicator goes above the zero line and there is a bullish divergence, you can take a long position.
It’s important to note that, in case of a pullback, volume bars can be lower when there is a strong trend. Lower volume suggests that traders are unsure about the reversal, which may imply that the market’s upward/downtrend can continue.
In addition, volume indicators are often used in combination with other technical analyses for further signal confirmation.
- The volume bars should be above the zero line or look for a bullish divergence.
- Wait for the price to continue upwards and then enter.
- You could place a stop-loss at the recent low.
- You could set take-profit at the recent high, or exit when the bars start dipping below the zero line.
- The volume bars should be below the zero line or look for a bearish
- Wait for the price to continue downwards and then enter.
- You could place a stop-loss at the recent high.
- You could set take-profit at the recent low, or exit when the bars start going above the zero
Directional Volume Indicator Pros & Cons
Here are the pros and cons of trading with the indicator.
- It can present clear entry and exit points.
- It works on all timeframes.
- The divergence strategy may be flawed.
- You have to apply other forms of technical analysis for further signal confirmation.
The Directional Volume Indicator is a momentum-based oscillator that tells about the trend’s direction. You can use it to locate key divergences along with the zero-line crossovers.
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