The Volume Flow Indicator (VFI) indicator is designed to identify and follow trends in the market. The VFI works by analyzing volume data and the output of the technical indicators mentioned above. It then uses this information to generate buy and sell signals, which it displays on the chart as lines.
What is the Volume Flow Indicator?
Similar to On Balance Volume, the Volume Flow Indicator is a long-term trend-following analysis. However, it compares the change in the mean price with a so-called “cut off” value based on standard deviation rather than comparing the close prices of two consecutive bars. The volume for each bar is then given a sign, positive or negative, depending on the comparison made before. The ratio of the cumulative sum of “directed” volume to the average volume over the previous 50 bars is exponentially smoothed as the end result.
Values that are higher than zero are bullish and suggest long-term accumulation. Conversely, negative levels signify distribution and are therefore a bearish signal. Divergence in volume may indicate a trend reversal, which is another purpose for the Volume Flow Indicator. When the Volume Flow Indicator fails to indicate a new High or Low in a cycle, the trend may be losing steam.
- The VFI is based on the On-Balance Volume (OBV) indicator, which measures the flow of volume in and out of a security.
- It also uses the moving average indicator to smooth out price data and identify trends.
- It generates buy and sell signals as lines displayed on the chart.
Volume Flow Strategy
There are several ways in which the Volume Flow Indicator (VFI) could potentially help traders become profitable in the Forex market.
First, the VFI is based on the On-Balance Volume (OBV) indicator, which tends to predict market movements rather than follow them. This means that the VFI may be able to generate buy and sell signals ahead of price movements, potentially providing traders with early warning of potential market trends.
Second, as a trend-following strategy, the VFI can be a relatively safe approach to trading in volatile markets. By following the direction of the trend, traders may be able to capitalize on sustained price movements and mitigate the risk of losing money due to sudden price reversals.
Finally, the VFI generates clear and concise buy and sell signals that can help traders make informed decisions about when to enter and exit trades. This can be particularly useful for traders who are new to the market and may not have the experience or knowledge to identify trends and generate signals independently.
Buy Signal
- The VFI sends a buy signal when it identifies a uptrend in the market.
- It may also send a buy signal when the OBV indicator shows a positive flow of volume into the security.
- In some cases, the VFI may send a buy signal when the moving average indicator indicates a bullish trend.
Sell Signal
- The VFI generates a sell signal when it detects a downtrend in the market.
- It may also send a sell signal if the OBV indicator shows a negative flow of volume out of the security.
- In certain situations, the VFI may send a sell signal when the moving average indicator indicates a bearish trend.
Volume Flow Indicator Pros & Cons
Pros
- The OBV indicator, which the VFI is based on, is a leading indicator that tends to predict market movements rather than follow them.
- Its trend-following approach can be a relatively safe way to trade in volatile markets.
- It provides clear and concise buy and sell signals that can help traders make informed decisions about their trades.
Cons
- The VFI may give false signals in choppy or range-bound markets, resulting in unprofitable trades.
- It may not be suitable for all trading styles and may not perform well in all market conditions.
- To effectively use the VFI, traders need a good understanding of volume data and how it relates to price movements.
Conclusion
The Volume Flow Indicator (VFI) is a commonly employed technical analysis tool by traders in the foreign exchange market. It utilizes the On-Balance Volume (OBV) indicator and the moving average indicator to identify and track market trends while generating buy and sell signals based on the analysis of volume data. Despite having both advantages and disadvantages, it has the potential to assist traders in achieving profitability in the market through the early detection of potential market trends, following trend direction, and providing explicit and concise signals.
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