Price Volume Divergence MT5 Indicator

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Imagine a scenario where stock prices are steadily climbing, reaching new highs with each passing day. Sounds like a dream for a long trader, right? But hold on a second. If you glance at the volume bars on your chart, and they’re telling a different story – shrinking consistently – that’s a red flag. This is a classic example of Price Volume Divergence.

In simpler terms, Price Volume Divergence occurs when the price movement of an asset contradicts the associated trading volume. It suggests a potential Imbalance between supply and demand, hinting at a possible trend reversal or continuation. By understanding these discrepancies, you can gain valuable insights into the market’s underlying sentiment.

Why Is Price Volume Divergence Important For MT5 Users?

The beauty of Price Volume Divergence lies in its ability to act as a leading indicator. While price movements often react to shifts in supply and demand, volume can sometimes precede these price changes. This gives MT5 users a potential early warning about a possible trend shift, allowing them to adjust their positions accordingly.

Imagine you’re in a long position on a stock that’s been on a tear. But then, you notice a persistent decline in volume despite rising prices. This divergence could be a signal that the uptrend might be losing steam, prompting you to consider taking profits or setting a stop-loss order to protect your capital.

Understanding Volume in MT5

Before diving deeper into Price Volume Divergence, let’s establish a solid foundation by understanding Volume in MT5.

Types Of Volume Data In MT5

MT5 provides two main types of volume data:

  • Tick Volume: This measures the number of individual price ticks that occur during a specific timeframe.
  • Real Volume: This reflects the actual number of shares or contracts traded within a timeframe.

Limitations Of Volume Data In Forex

For MT5 users primarily focused on the Forex market, it’s important to acknowledge a key limitation: forex volume data is not always directly available. This is because forex trades are executed electronically across decentralized networks, making it challenging to track the exact number of units traded.

However, don’t despair! While real volume data might be absent, MT5 offers alternative volume indicators like Tick Volume and indicators derived from price data, such as the On-Balance-Volume (OBV), which we’ll discuss later. These tools can still provide valuable insights into market activity, even if they don’t represent the true traded volume.

Types Of Price Volume Divergence

Now that we understand the significance of volume, let’s explore the different types of Price Volume Divergence:

Regular Bullish Divergence

This scenario occurs when price makes lower lows, but volume creates higher lows. In simpler terms, even though the price is dipping, the declining volume suggests dwindling selling pressure. This could be a sign that the downtrend might be losing momentum, potentially hinting at an upcoming reversal toward a bullish trend.

Hidden Bearish Divergence

This scenario occurs when price makes lower highs, but volume creates higher highs. While the price attempts to push higher, the increasing volume suggests a rise in selling pressure. This could be a sign of potential weakness in the uptrend, hinting at a possible bearish reversal.

Identifying Divergence On MT5 Charts

Spotting Price Volume Divergence on your MT5 charts is a relatively straightforward process. Here’s a quick guide:

  • Load your desired instrument and timeframe in MT5.
  • Add a volume indicator to your chart. Popular options include Tick Volume or custom indicators based on price data like OBV (we’ll discuss these indicators in more detail later).
  • Analyze price movements alongside the volume bars. Look for discrepancies between the two.
  • Identify potential divergence patterns: Is price making new highs/lows while volume creates lower/higher lows/highs?

Remember, a single instance of divergence shouldn’t be considered a definitive trading signal. It’s always wise to combine Price Volume Divergence with other technical analysis tools like support and resistance levels, trendlines, or momentum indicators for a more robust trading strategy.

Combining Price Volume Divergence with Other Indicators

Remember, Price Volume Divergence is just one piece of the puzzle. Here are some effective ways to combine it with other indicators:

  • Moving Averages: Use moving averages to identify the overall trend. Divergence against the trend direction can be a powerful signal.
  • MACD: The convergence/divergence of the MACD lines can complement the signals from Price Volume Divergence.
  • RSI: Look for divergence between price and RSI readings. An overbought RSI alongside a bullish divergence might suggest a weaker uptrend, while an oversold RSI with a bearish divergence could indicate a potential reversal.

Advantages of Price Volume Divergence

  • Potential for Early Trend Reversal Identification: Divergence can provide clues about potential trend shifts before they occur in price, allowing for proactive trading decisions.
  • Increased Confidence in Existing Trends: When divergence confirms the direction of an established trend, it can boost your confidence in holding existing positions.

Limitations Of Price Volume Divergence

  • Challenges of False Signals: Not all divergences lead to immediate trend reversals. The market can sometimes experience “false divergences” that fizzle out without a significant trend change.
  • Dependence on Market Context: The effectiveness of Price Volume Divergence can vary depending on market conditions. It might be more reliable in trending markets compared to choppy or range-bound markets.

Advanced Techniques for Price Volume Divergence

For experienced traders seeking to refine their Price Volume Divergence analysis, here are some advanced techniques:

Divergence with Volume Oscillators

Certain indicators, like the MACD Volume, combine price and volume data into a single oscillator. The divergence between the oscillator and price can offer additional confirmation signals.

Identifying Divergence on Different Timeframes

Analyze divergence patterns on multiple timeframes (e.g., daily and hourly charts). If divergence appears on multiple timeframes, it can strengthen the potential for a trend shift.

Combining Divergence with Price Action Patterns

Look for confluence between divergence and established price action patterns like head and shoulders or double tops/bottoms. This combined analysis can provide even more robust trading signals.

How to Trade with Price Volume Divergence Indicator

Buy Entry

  1. Identify: Look for lower lows in price with higher lows in volume (Regular Bullish Divergence) or higher lows in price with lower lows in volume (Hidden Bullish Divergence).
  2. Confirmation: Wait for a price break above a resistance level or a bullish candlestick pattern like a hammer or engulfing bar.
  3. Entry: Enter long after the confirmation signal.
  4. Stop-Loss: Place below the recent swing low or support level.
  5. Take-Profit: Target a potential profit level based on technical analysis (e.g., Fibonacci retracement levels) or set a trailing stop-loss to lock in profits.

Sell Entry

  1. Identify: Look for higher highs in price with lower highs in volume (Regular Bearish Divergence) or lower highs in price with higher highs in volume (Hidden Bearish Divergence).
  2. Confirmation: Wait for a price break below a support level or a bearish candlestick pattern like a shooting star or bearish engulfing bar.
  3. Entry: Enter short after confirmation signal.
  4. Stop-Loss: Place above the recent swing high or resistance level.
  5. Take-Profit: Target a potential profit level based on technical analysis or set a trailing stop-loss to lock in profits.

Conclusion

The price Volume Divergence (PVD) indicator for MT5 is a valuable tool for traders to identify potential turning points in the market. By analyzing the relationship between price movements and volume changes, the PVD indicator can signal when price trends may be losing momentum or when a trend reversal might be imminent. By incorporating PVD into your trading strategy alongside other technical indicators, you can potentially improve your trade entries and exits for better results.

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