Neglected Volume by DGTVolume is one piece of information that is often neglected, however, learning to interpret volume brings many advantages and could be of tremendous help when it comes to analyzing the markets. In addition to technicians, fundamental investors also take notice of the numbers of shares traded for a given security.
What is Volume?
The volume represents all the recorded trades for a security that occurs in a given time interval. It is a measurement of the participation, enthusiasm, and interest in a given security. Think of volume as the force that drives the market. Volume substantiates, energizes, and empowers price. When volume increases, it confirms price direction; when volume decreases, it contradicts price direction.
In theory, increases in volume generally precede significant price movements. However, If the price is rising in an uptrend but the volume is reducing or unchanged, it may show that there’s little interest in the security, and the price may reverse.
A high volume usually indicates more interest in the security and the presence of institutional traders. However, a rapidly rising price in an uptrend accompanied by a huge volume may be a sign of exhaustion.
Traders usually look for breaks of support and resistance to enter positions. When security break critical levels without volume, you should consider the breakout suspect and prime for a reversal off the highs/lows
Volume spikes are often the result of news-driven events. Volume spike will often lead to sharp reversals since the moves are unsustainable due to the imbalance of supply and demand
note : there’s no centralized exchange where trades are recorded, so the volume data represents what happens at a particular exchange only
In most charting platforms, the volume indicator is presented as color-coded bars, green if the security closes up and red if the security closed lower, where the height of the bars show the amount of the recorded trades
Within this study, Relative Volume , Volume Weighted Bars and Volume Moving Average are presented, where Relative Volume relates current trading volume to past trading volume over long period, Volume Weighted Bars presents price bars colored based on short period past trading volume average, and Volume Moving Average is average of volume over shot period
Relative Volume is presented as color-coded bars similar to regular Volume indicator but uses four color codes instead two. Notable increases of volume are presented in green and red while average values with back and gray, hence adding ability to emphasis notable increases in the volume. It is kind of a like a radar for how "in-play" a security is. Users are allowed to change the threshold, default value is set to Fibonacci golden ration standard deviation away from its moving average.
Volume Weighted Bars, a study of Kıvanç Özbilgiç, aims to present if price movements are supported by Volume. Volume Weighted Bars are calculated based on shot period volume moving average which will reflect more recent changes in volume. Price actions with high volume will be displayed with darker colors, average volume values will remain as they are and low volume values will be indicated with lighter colors.
Volume Moving Average, Is short period volume moving average, aims to display visually the volume changes. Please not that Relative Volume bars are calculated based on standard deviation of long volume moving average.
What Else?
Apart from the volume itself, your ability to assess what volume is telling you in conjunction with price action can be a key factor in your ability to turn a profit in the market. It makes little sense to analyze the volume alone. To correctly interpret the volume data, it shall be seen in the light of what the price is doing. there are a lot of other indicators that are based on the volume data as well as price action. Analysing those volume indicators has always helped traders and investors to better understand what is happening in the market.
Here are the ones adapted with this study. Some of them used as a source for our aim, some adapted as they are with slight changes to fit visually to this study and please note that the numerical presentation may differ from their regular use
• On Balance Volume
• Divergence Indicator
• Correlation Coefficient
• Chaikin Money Flow
Shortly;
On Balance Volume
The On Balance Volume indicator, is a technical analysis indicator that relates volume flow to changes in a security’s price. It uses a cumulative total of positive and negative trading volume to predict the direction of price. The OBV is a volume-based momentum oscillator, so it is a leading indicator — it changes direction before the price
Granville, creator of OBV, proposed the theory that changes in volume precede price movements in a measurable way. He believed that volume was the main force behind major market moves and thought of OBV’s prediction of price changes as a compressed spring that expands rapidly when released.
It is believed that the OBV shows the interactions between the institutional and retail traders in the market
If the price makes a new high, the OBV should also make a new high. If the OBV makes a lower high when the price makes a higher high, there’s a classical bearish divergence — indicating that only the retail traders are buying. Another type of bearish divergence occurs when the price remains relatively quiet and fails to make a higher high but the OBV soars higher than the previous high — indicating that the institutional traders are accumulating short positions. On the other hand, if the price makes a lower low and the OBV makes a higher low, there is a classical bullish divergence, showing that the institutional traders don’t believe in that move
With this study, Momentum and Acceleration (optional) of OBV is calculated and presented, where momentum is most commonly referred to as a rate and measures the acceleration of the price and/or volume of a security. It is also referred to as a technical analysis indicator and oscillator that is able to determine market trends.
Additionally, smoothing functionality with Least Squares Method is added
Divergences especially, should always be noted as a possible reversal in the current trend, so the divergence indicator is adapted with this study where the Momentum of OBV is assumed as Oscillator with similar usages as to RSI. Divergence is most often used to track and analyze the momentum in an asset’s price and the odds of a price reversal within the current trend. The divergence indicator warns traders and technical analysts of changes in a price/volume trend, oftentimes that it is weakening or changing direction.
Correlation Coefficient
The correlation coefficient is a statistical measure of the strength of the relationship between the relative movements of two variables. A correlation of -1.0 shows a perfect negative correlation, while a correlation of 1.0 shows a perfect positive correlation. A correlation of 0.0 shows no linear relationship between the movement of the two variables. In other words, the closer the Correlation Coefficient is to 1.0, indicates the instruments will move up and down together as it is mostly expected with volume and price. So the Correlation Coefficient Indicator aims to display when the price and volume (on balance volume) is in correlation and when not. With this study blue represent positive correlation while orange negative correlation. The strength of the correlation is determined by the width of the bands, to emphasis the effect horizontal lines are drawn with values set to 0.5 and -0.5. the values above 0.5 (or below -0.5) shows stronger correlation.
Chaikin Money Flow , provide optionally as a companion indicator
The Chaikin money flow indicator (CMF) is a volume indicator that measures the money flow volume over a chosen period. The money flow volume is a measure of the volume and where the price closed relative to the trading session’s range. It comes from the idea that buying pressure is indicated by a rising volume and recurrent closes in the upper part of the session’s price range while selling pressure is demonstrated by an increasing volume and repeated closes in the lower part of the price range.
Both buying and selling pressures are accompanied by an increase in volume, but the location of the closing prices are in accordance with the direction of price
Special thanks to @InvestCHK and @hjsjshs , who have enormously contributed while preparing this study
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