The dollar volume tool is looking to track how many US dollars (or US dollar equivalents) are traded during a certain day for a certain asset.
With the majority of trading software, you won’t normally see the dollar volume indicator shown on anything shorter than a daily chart, and some programs won’t track dollar volume data for certain assets, particularly if they’re foreign stocks and forex.
You’ll usually find dollar volume used with an adjustable 50-period moving average (see below) and the combination of them can help to tell you how volatile a particular asset is.
Dollar Volume Indicator Uses
It’s considered conventional wisdom that price follows volume, but some technical analysts will tell you that looking at volume alone isn’t all that helpful. They’ll point out that however many shares have been traded doesn’t tell you enough because there’s no accounting for price, and after all, price is key because markets are built on how many dollars or other currencies are currently changing hands.
For that reason, dollar volume can be a better volume indicator, and its boundaries are usually represented as green for the top one and read for the bottom one.
Seeing a few green bars arranged in a row and growing in size might be taken for a bull sign by some traders. And they might also take a line of red bars as a bear sign.
A fall in volume with a mix of red and green bars might point to a market that’s consolidating, and traders who favor directional movement might choose to close trades in this situation. Others will stay in the game because they still have strategies for profiting in low volatility environments.
A lot of traders think that volume will trend over time. If you see a rising dollar volume it might be that markets will soon experience greater volatility.
Using dollar volume as a stand-in for volatility can help you to work out how much leverage you should be using. Leverage can greatly magnify losses and so poses a greater risk when prices are swinging around (although some traders love this cauldron of volatility because if they play their cards right it can also magnify their gains).
But fear trumps greed (usually) and volatility usually tense falloff in falling markets. Traders will often react to turbulence by divesting their portfolios of risk, cutting back on leverage, and maintaining fewer positions.
One advantage of dollar volume is that unlike others it can distinguish between good and bad volatility because it accounts for money going into and out of an asset.
A traditionally bullish trader looking at a positive dollar volume might be inclined to take a new position or be comfortable letting an open one run. Conversely, if they saw a negative dollar volume they would reign their activity in.
Conclusion
With the simple moving average, you get a more typical view of volume. The way that its slope is curving gives you a very straightforward way of picturing rising, falling or stable volume. The dollar volume indicator on the other hand gives traders more useful data than looking at volume alone. Because it measures money flow over a given period it’s thought that it paints a truer picture of risk and reward potentials for traders.
