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Volume Rate of Change (V-ROC) Indicator

The Volume Rate of Change (V-ROC) is an indicator used to determine whether a volume trend is developing in either an upward or downward direction.

It allows traders and investors to gauge the speed at which the volume is changing over a specific period of time.

V-ROC is calculated by dividing the change in volume over a certain number of periods (such as days, weeks, or months) by the volume from n-periods ago, and the result is expressed as a percentage.

A positive V-ROC indicates that today’s volume is higher than it was n-periods ago, while a negative V-ROC indicates that volume is lower.

Volume and Price Movements

Over the last decade, the market has experienced large price swings, but not all of these moves have been supported by volume.

For chartists and technical analysts, the conviction behind a price move matters just as much as the price change itself.

Without sufficient volume, even a price movement of 5-10% in a stock can lack significance.

Conversely, in markets like the Nasdaq, where volume often exceeds two billion shares per day, any significant price action with strong volume draws analysts’ attention.

Volume Trend Indicator

V-ROC helps analysts determine whether a developing trend has sufficient volume to support it.

While it resembles price rate of change (which measures the rate of change in closing prices), V-ROC measures volume instead.

A shorter period, such as 10 to 15 days, may reveal sharp peaks in volume change, while a longer period of 25 to 30 days tends to produce smoother and more rounded charts.

This makes longer periods easier to analyze for identifying significant trends in volume.

Examples of V-ROC in Action

In the chart of the Nasdaq Composite Index, a 14-day V-ROC shows a significant spike on December 13, 2001, with a high of 249.00.

The V-ROC became positive on December 12, 2001, showing the potential for a market move after a decline in price that confused some investors.

However, when the V-ROC is analyzed using a 30-day period, it becomes clearer that the real positive volume trend doesn’t appear until January 3, 2002.

This longer period highlights more substantial price movement from 1987.06 to 2098.88, showing market support for the trend.

Analyzing Volume and Market Trends

The V-ROC, whether using a 14-day or 30-day period, often hovers above and below the zero line, indicating no strong trend.

In July 2002, a five-day price move occurred, which was not sustained due to the lack of volume, illustrating the importance of analyzing volume in conjunction with price action.

Later, in August 2002, the Nasdaq saw a price increase from 1206.01 to 1422.95, yet the V-ROC remained negative, signaling that the price move lacked conviction and was unlikely to hold.

Concluding Thoughts

V-ROC is a valuable tool for confirming price movements that have real market support.

By analyzing the volume behind price action, traders can avoid making decisions based on temporary market blips that are likely to be corrected.

It’s important to watch both volume and price trends to make informed investment choices.

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On-Balance Volume (OBV) Indicator

On-balance volume (OBV) is a technical trading momentum indicator that uses volume flow to predict changes in stock price.

It was developed by Joseph Granville and introduced in his 1963 book Granville’s New Key to Stock Market Profits.

Granville believed that volume was the key force behind markets and designed OBV to predict major moves based on volume changes.

He described OBV as akin to “a spring being wound tightly,” where a sharp increase in volume without a significant price change would eventually lead to a price jump upward or downward.

Formula for On-Balance Volume (OBV)

The formula for OBV is:

OBV = Previous OBV + {volume, if the close is higher than the previous close, if the close is the same as the previous close −volume, if the close is lower than the previous close}

Where:

  • OBV is the current on-balance volume level.
  • Previous OBV is the OBV from the prior day.
  • Volume is the latest trading volume amount.

Calculating On-Balance Volume

OBV provides a running total of an asset’s trading volume, indicating whether the volume is flowing in or out of the security.

There are three rules for calculating OBV:

  1. If today’s closing price is higher than yesterday’s, the current OBV = Previous OBV + today’s volume.
  2. If today’s closing price is lower than yesterday’s, the current OBV = Previous OBV – today’s volume.
  3. If today’s closing price is equal to yesterday’s, the current OBV = Previous OBV.

What Does OBV Tell You?

OBV is based on the distinction between institutional investors (“smart money”) and less sophisticated retail investors.

When institutions start buying an asset, volume may increase even if the price remains stable.

Eventually, volume pushes the price upward as larger investors sell and smaller investors buy.

The OBV indicator itself is cumulative, and traders focus on its movement over time rather than its numerical value.

The slope of the OBV line is key for analysis, tracking volume numbers to signal potential opportunities for buying or selling.

Example of How to Use OBV

Consider a stock with 10 days of closing prices and volumes:

  • Day 1: Price = $10, Volume = 25,200 shares
  • Day 2: Price = $10.15, Volume = 30,000 shares
  • Day 3: Price = $10.17, Volume = 25,600 shares

On days where prices rise, volumes are added to the OBV, and on down days, volumes are subtracted.

The OBV values over the 10 days would be as follows:

  • Day 1 OBV = 0
  • Day 2 OBV = 30,000
  • Day 3 OBV = 55,600

OBV vs. Accumulation/Distribution

While OBV and the accumulation/distribution (Acc/Dist) line are both volume-based indicators, they differ in their calculation.

OBV adds or subtracts volume based on whether the price closed higher or lower.

Acc/Dist uses the position of the current price relative to its recent trading range, multiplied by the volume.

Limitations of OBV

  1. OBV is a leading indicator and can produce false signals due to its predictive nature.
  2. A large spike in volume on a single day (e.g., due to a surprise earnings announcement) can throw off the OBV for a long period.
  3. To reduce the likelihood of false signals, OBV is often used with lagging indicators such as moving averages.

Concluding Thoughts

On-balance volume (OBV) is a valuable technical indicator that measures volume flow to predict price direction.

While it offers insights into market sentiment and potential price movements, OBV should be used in conjunction with other indicators to confirm its signals and avoid false interpretations.

Balancing OBV with lagging indicators can provide a more comprehensive view for making informed trading decisions.

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Volume-Weighted Average Price (VWAP)

The volume-weighted average price (VWAP) is a technical analysis indicator used on intraday charts that resets at the start of each new trading session.

It represents the average price at which a security has traded throughout the day, taking into account both price and volume.

VWAP is important because it provides traders with insight into both the price trend and the value of a security.

Understanding the Volume-Weighted Average Price (VWAP)

VWAP is calculated by summing the dollars traded for each transaction (price multiplied by volume) and then dividing that by the total shares traded.

Formula

The formula for VWAP is:

VWAP = (Cumulative Typical Price × Volume) / Cumulative Volume

Where:

  • Typical Price = (High Price + Low Price + Closing Price) / 3
  • Cumulative = Total trades since the trading session opened

How to Calculate VWAP

Although adding the VWAP indicator to a streaming chart automates the calculation, here’s how to calculate it manually.

  1. Determine the average price the stock traded at during the first five-minute period of the day. Add the high, low, and close, then divide by three. Multiply this by the volume for that period, and record the result in a spreadsheet under “PV” (price and volume).
  2. Divide PV by the volume for that period to get VWAP.
  3. Continue adding the PV value from each period to the prior values and divide the total by the total volume up to that point to maintain the VWAP throughout the day.

How Is VWAP Used?

Traders use VWAP in various ways.

They may treat it as a trend confirmation tool, considering prices below VWAP as undervalued and prices above it as overvalued.

For instance, if a stock price moves above VWAP, traders may go long on the stock, and if it moves below, they may sell or go short.

Institutional buyers also use VWAP to minimize market impact by trying to buy below VWAP or sell above it, ensuring their actions don’t artificially move the stock price.

VWAP vs. Simple Moving Average

VWAP and simple moving average (SMA) may look alike on a chart, but they differ in calculation.

VWAP incorporates both price and volume, while SMA only incorporates price.

The SMA is calculated by averaging the closing prices over a specific period, while VWAP accounts for volume-weighted prices.

Limitations of VWAP

  1. VWAP is a single-day indicator that resets each day, making it difficult to use over extended periods.
  2. While useful, VWAP should not be the only factor considered, as in strong uptrends, waiting for prices to fall below VWAP could result in missed opportunities.
  3. VWAP is based on historical values, making it a lagging indicator with increasing lag as the day progresses.

What Does VWAP Tell You?

VWAP helps traders gauge liquidity and the price at which buyers and sellers agree.

It offers insight into price movement throughout the day and can guide trading decisions.

Why Is the Volume-Weighted Average Price Important?

VWAP provides a smoothed view of a security’s price, adjusted for volume, helping institutional traders execute orders without significantly affecting the stock’s price.

For example, a hedge fund may avoid buying above VWAP to prevent inflating the price or selling below VWAP to avoid dragging down the price.

Is VWAP a Leading Indicator?

No, VWAP is a lagging indicator since it uses historical data.

It is valuable for specific uses, but it does not offer real-time insights for traders seeking up-to-the-minute data.

Concluding Thoughts

VWAP is a valuable tool in technical analysis for determining the average price of a security during a single trading session.

While useful for tracking intraday price trends and liquidity, it is a lagging indicator best utilized in conjunction with other tools for more comprehensive market analysis.

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What are Volume Indicators for Trading?

Volume refers to the total amount of a security or item that is traded over time, typically within a trading day.

For instance, the number of shares exchanged between a stock’s daily open and close is known as its trading volume.

Technical traders rely heavily on key information like trading volume and changes in volume over time to make informed decisions.

Importance of High Volume

High volume signals increased interest in the stock, indicating the active presence of buyers and sellers.

When a stock is in an uptrend and volume increases, this suggests that the stock will continue rising, as more buyers are interested in acquiring it.

Similarly, when a stock is in a downtrend and volume increases, it signals that the stock will continue declining, as more sellers are looking to offload it.

This behavior can be clearly seen in the daily chart of Reliance Ltd., where rising volumes lead to increasing stock prices.

Importance of Low Volume

Low volume indicates a lack of interest in the stock.

When a stock is moving up but volume decreases, it suggests that buyers are losing interest, potentially signaling a reversal of the uptrend.

Similarly, when a stock is declining and volume drops, it implies that sellers are losing interest, possibly indicating a reversal of the downtrend.

Price Volume What is Expected
Up Up Bullish
Up Down Caution – weak hands buying
Down Up Bearish
Down Down Caution – weak hands selling

Types of Volume Indicators

  1. On-Balance Volume (OBV): OBV is a cumulative indicator that sums up volume on up days and subtracts volume on down days. It helps gauge buying and selling pressure.
  2. Volume RSI: Similar to the Relative Strength Index (RSI), Volume RSI uses up-volume and down-volume to provide trading signals based on crossovers around the 50% center line.
  3. Volume Price Trend (VPT) Indicator: VPT assesses both price direction and the strength of price changes, helping traders confirm trends or detect divergences between price and volume.
  4. Money Flow Index (MFI): This indicator measures trading pressure using both price and volume, and is similar to RSI but volume-weighted.
  5. Chaikin Money Flow (CMF) Indicator: CMF evaluates market strength by measuring money flow volume over a period, typically 20 to 21 days, and can help confirm breakout directions.
  6. Accumulation/Distribution Line: This indicator tracks the cumulative flow of money into or out of a stock, helping identify divergences that signal future price movements.
  7. Ease of Movement (EMV): EMV measures how easily a stock price moves between levels based on volume trends, often used in volatile markets.
  8. Negative Volume Index (NVI): NVI focuses on days with declining volume, assuming that smart money is active on those days, and can indicate bull or bear markets.
  9. Volume-Weighted Average Price (VWAP): VWAP shows the average price of a security throughout a session, incorporating both price and volume, helping traders assess whether a security was bought or sold at a fair price.

Concluding Thoughts

Volume analysis is a critical aspect of technical trading, providing insight into market trends and potential reversals.

By using volume indicators like OBV, VWAP, and MFI, traders can enhance their ability to interpret price movements and refine their trading strategies.

Understanding the relationship between price and volume is essential for making informed decisions in the stock market.

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Ichimoku Kinko Hyo Cloud Indicator

The Ichimoku Cloud is a collection of technical indicators that show support and resistance levels, as well as momentum and trend direction.

It does this by taking multiple averages and plotting them on a chart.

It also uses these figures to compute a “cloud” that attempts to forecast where the price may find support or resistance in the future.

The Ichimoku Cloud was developed by Goichi Hosoda, a Japanese journalist, and published in the late 1960s.

It provides more data points than the standard candlestick chart.

While it seems complicated at first glance, those familiar with how to read the charts often find it easy to understand with well-defined trading signals.

The Formulas for the Ichimoku Cloud

The following are the five formulas for the lines that comprise the Ichimoku Cloud indicator:

Conversion Line (tenkan sen) = (9-PH + 9-PL) ÷ 2
Base Line (kijun sen) = (26-PH + 26-PL) ÷ 2
Leading Span A (senkou span A) = (CL + Base Line) ÷ 2
Leading Span B (senkou span B) = (52-PH + 52-PL) ÷ 2
Lagging Span (chikou span) = Close plotted 26 periods in the past

Where:
PH = Period high
PL = Period low
CL = Conversion line

How to Calculate the Ichimoku Cloud

The highs and lows are the highest and lowest prices seen during the period—for example, the highest and lowest prices seen over the last nine days in the case of the conversion line.

Adding the Ichimoku Cloud indicator to your chart will do the calculations for you, but if you want to calculate it by hand, here are the steps:

  1. Calculate the Conversion Line and the Base Line.
  2. Calculate Leading Span A based on the prior calculations. Once calculated, this data point is plotted 26 periods into the future.
  3. Calculate Leading Span B. Plot this data point 26 periods into the future.
  4. For the Lagging Span, plot the closing price 26 periods into the past on the chart.
  5. The difference between Leading Span A and Leading Span B is colored in to create the cloud.
  6. When Leading Span A is above Leading Span B, color the cloud green. When Leading Span A is below Leading Span B, color the cloud red.

The above steps will create one data point.

To create the lines, as each period comes to an end, go through the steps again to create new data points for that period.

Connect the data points to each other to create the lines and cloud appearance.

What Does the Ichimoku Cloud Tell You?

The technical indicator shows relevant information at a glance by using averages.

The overall trend is up when the price is above the cloud, down when the price is below the cloud, and trendless or transitioning when the price is in the cloud.

When Leading Span A is rising and above Leading Span B, this helps to confirm the uptrend, and the space between the lines is typically colored green.

When Leading Span A is falling and below Leading Span B, this helps confirm the downtrend.

The space between the lines is typically colored red in this case.

Traders will often use the Ichimoku Cloud as an area of support and resistance depending on the relative location of the price.

The cloud provides support/resistance levels that can be projected into the future.

This sets the Ichimoku Cloud apart from many other technical indicators that only provide support and resistance levels for the current date and time.

Traders should use the Ichimoku Cloud in conjunction with other technical indicators to maximize their risk-adjusted returns.

For example, the indicator is often paired with the relative strength index (RSI), which can be used to confirm momentum in a certain direction.

It’s also important to look at the bigger trends to see how the smaller trends fit within them.

For example, during a very strong downtrend, the price may push into the cloud or slightly above it temporarily before falling again.

Only focusing on the indicator would mean missing the bigger picture that the price was under strong longer-term selling pressure.

Crossovers are another way that the indicator can be used.

Watch for the conversion line to move above the base line, especially when the price is above the cloud.

This can be a powerful buy signal.

One option is to hold the trade until the conversion line drops back below the base line.

Any of the other lines could be used as exit points as well.

The Difference Between the Ichimoku Cloud and Moving Averages

While the Ichimoku Cloud uses averages, they are different than a typical moving average.

Simple moving averages take closing prices, add them up, and divide that total by how many closing prices there are.

In a 10-period moving average, the closing prices for the last 10 periods are added, then divided by 10 to get the average.

Notice how the calculations for the Ichimoku Cloud are different.

They are based on highs and lows over a period and then divided by two.

Therefore, Ichimoku averages will be different from traditional moving averages, even if the same number of periods are used.

One indicator is not better than another; they just provide information in different ways.

Limitations of Using the Ichimoku Cloud

The indicator can make a chart look busy with all the lines.

To remedy this, most charting software allows certain lines to be hidden.

For example, all of the lines can be hidden except for Leading Span A and Leading Span B, which create the cloud.

Each trader needs to focus on which lines provide the most information, then consider hiding the rest if all of the lines are distracting.

Another limitation of the Ichimoku Cloud is that it is based on historical data.

While two of these data points are plotted in the future, there is nothing in the formula that is inherently predictive.

Averages are simply being plotted in the future.

The cloud can also become irrelevant for long periods of time, as the price remains way above or way below it.

At times like these, the conversion line, the base line, and their crossovers become more important, as they generally stick closer to the price.

Concluding Thoughts

The Ichimoku Cloud is a versatile tool for traders, providing information on support and resistance levels, trend direction, and momentum at a glance.

While it may initially seem complex, its well-defined trading signals make it accessible once understood.

However, like any technical indicator, the Ichimoku Cloud has its limitations, particularly when used in isolation.

It is most effective when combined with other indicators and risk management strategies to create a well-rounded approach to market analysis.

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