AVL indicator explained for beginners

What is the AVL Indicator?

The AVL indicator, also known as the Awesome Volume Levels indicator, is a technical analysis tool used in cryptocurrency trading to help traders identify potential trend reversals and confirm price movements through volume analysis. Unlike traditional volume indicators that simply display volume bars, the AVL indicator provides a more nuanced interpretation by analyzing volume in relation to price action. It is particularly popular among day traders and swing traders who rely on volume as a confirmation signal for their trading strategies.

The AVL indicator typically appears as a histogram below the price chart and fluctuates above and below a zero line. When the histogram bars are green, it indicates that the current volume is higher than the previous period's volume, suggesting increasing buying pressure. Conversely, red bars indicate that volume is decreasing compared to the prior period, signaling weakening momentum or selling pressure.

How Does the AVL Indicator Work?

The AVL indicator calculates the difference between the current volume and the average volume of a previous period, usually the last 34 periods. This calculation helps traders visualize how volume is changing over time and whether it is increasing or decreasing in a meaningful way.

• The AVL value for each period is calculated as:AVL = Current Volume - Average Volume (of the last 34 periods)
• When the AVL value is positive, it means that volume is stronger than the average, and the histogram bar appears green.
• When the AVL value is negative, it suggests that volume is weaker than the average, and the histogram bar appears red.

This dynamic visualization helps traders spot volume divergences, which can be early signs of trend reversals. For instance, if the price is rising but the AVL histogram is showing lower highs, it could signal that the uptrend is losing momentum.

Using AVL Indicator to Confirm Price Trends

One of the primary uses of the AVL indicator is to confirm price trends. In a healthy uptrend, volume should generally increase as prices rise. Similarly, in a downtrend, volume should increase as prices fall. If the AVL histogram aligns with the direction of the price, it strengthens the validity of the trend.

• In an uptrend, consistent green AVL bars indicate that buyers are actively pushing the price higher.
• In a downtrend, red AVL bars growing in size suggest that sellers are dominating the market.

However, when the AVL histogram starts to diverge from the price movement, it can signal a potential reversal. For example, if the price makes a new high but the AVL histogram makes a lower high, it could indicate that the rally is losing strength.

Spotting Divergences with the AVL Indicator

Divergences are one of the most powerful signals that the AVL indicator can provide. A divergence occurs when the price and the AVL histogram move in opposite directions, suggesting a potential change in market sentiment.

Here’s how to identify divergences using the AVL indicator:

• Look for a situation where the price is making higher highs, but the AVL histogram is making lower highs — this is a bearish divergence and may indicate an upcoming downtrend.
• Conversely, if the price is making lower lows, but the AVL histogram is making higher lows, this is a bullish divergence and could signal an upcoming uptrend.

Traders often combine this divergence analysis with other technical tools such as moving averages or RSI to increase the reliability of the signals.

Setting Up the AVL Indicator on Trading Platforms

Most modern trading platforms like TradingView, MetaTrader 4/5, and Binance's native tools allow users to add custom indicators. Here’s how to add the AVL indicator on TradingView:

• Open your preferred chart on TradingView.
• Click on the 'Indicators' button located at the top of the chart.
• Use the search bar to look for 'Awesome Volume Levels' or 'AVL'.
• Select the indicator and click 'Add to Chart'.
• Adjust the settings if necessary (default is usually 34 periods).
• Observe the histogram below the price chart and start analyzing volume patterns.

Some platforms may require you to manually upload the indicator script if it's not available in the default library. Make sure to download the script from a trusted source and follow the platform-specific instructions for installation.

Common Mistakes Beginners Make with AVL Indicator

Beginners often fall into the trap of over-relying on the AVL indicator without considering the broader market context. Some common mistakes include:

• Ignoring price action: The AVL should be used in conjunction with price patterns and candlestick formations, not in isolation.
• Failing to adjust settings: The default 34-period setting may not suit all timeframes or trading styles. Experiment with different settings based on your strategy.
• Misinterpreting short-term fluctuations: Not every red or green bar indicates a trade opportunity. Focus on trends and divergences rather than individual bars.
• Neglecting other indicators: Volume is just one piece of the puzzle. Combine AVL with tools like moving averages, RSI, or MACD for better accuracy.

Avoiding these pitfalls can significantly improve the effectiveness of the AVL indicator in your trading decisions.

Frequently Asked Questions (FAQs)

Q: Can the AVL indicator be used for all cryptocurrencies?Yes, the AVL indicator works with all cryptocurrencies as it is based purely on volume and price data, which are universal across all assets.

Q: Is the AVL indicator suitable for scalping strategies?While the AVL can be applied on short timeframes, it's generally more effective for day trading or swing trading due to its reliance on volume trends that take time to develop.

Q: How does AVL differ from the standard volume indicator?The standard volume indicator only shows the total volume per period, while the AVL provides a comparative view by showing how current volume relates to the average volume over a set period.

Q: Can I use the AVL indicator on non-crypto assets?Absolutely. The AVL indicator is applicable to any financial market that includes volume data, including stocks, forex, and commodities.