VolSum and VolShift - Further ideas on teasing information out of Volume

Note: I wrote this article for Howard Arrington's Ensign Newsletter, May 2005. I have edited the order as the Price Exhaustion discussion was misplaced in the original article. Additionally, as the template is available as a direct download for Ensign users, DYOS images are not included.

Volume Summation Indicator with Exhaustion Alert
by Ana Maria Gallo

Aside from price itself, volume represents the commitment of traders to take a position. Richard Wyckoff referred to volume as the "cause" and price the "effect", indicating that to him, volume leads price. Over time many indicators have been created to gauge volume strength: Accumulation Distribution, Chaikin Oscillator, Money Flow Index, On Balance Volume, and simple moving averages or rate of change indicators on volume. All have their uses and are worthy of study by the student of volume.

While time is often on the side of a swing or position trader, who can evaluate volume directly or through comparison using such indicators? The day-trader needs a quick, intuitive, and preferably, visual confirmation that the tide has likely turned. Fast markets need rapid decisions and during the torpor of a slow market, small clues help alert the trader to "pay attention". Momentum bars using tick are particularly useful to day traders as they reflect price speed. Unfortunately, as for minute based bars, volume for tick bars is also flat looking and difficult to quickly read.

Two studies are presented:

Volume Summation with Price Exhaustion (VolSum)

Volume Shift (Vshift)

Ensign Template

The VolSum with Price Exhaustion and VShift alerts have all been collected on one template for Ensign Windows users. Use the Internet Services form to download the VolSumVshift template directly from the Ensign web site.

VolSum: Volume Summation with Price Exhaustion

The original VolSum has been in use since March 2005, when the original DYOS was provided to the Ensign users in the dacharts.com Quick Tips section. Since then, some additional features have been added, such as intuitive plotting of VolSum and inclusion of a Price Exhaustion indicator developed by Tricky.

The VolSum indicator was created to provide a quick visual look at volume behavior relative to price that might otherwise be lost. This indicator is also useful on intra-day minute charts, and perhaps surprisingly on constant volume charts. A suggested user-modification for the later is to alternatively experiment using Tick Count rather than Volume. This can be done by a small change on the VolSum DYOS.

The Volume Sum DYOS tallies of volume for a run of UP (or DOWN) bars, draws a histogram of the running total, and resets itself to zero when the run completes. Doji bars (i.e. Close=Open) are counted as part of the run in progress. This means there will be places where the histograms overlaps. This is reasonable as a Doji indicates indecision and the price pressure volume represents could flow either way. Note too that a value axis is not shown. This is by intent, as the relative values and shapes are what are, in my opinion, of best use in this tool. However, when used on larger intraday time frames (e.g. 15-minute), the peak VolSum bars can be used to gauge potential "balance" volume required to absorb the prior buying or selling spree.

One of the most pleasant aspects of the www.dacharts.com trading community is the sharing of ideas, charts, and, of course, templates. "Tricky", a fellow trader in the dacharts.com community, wrote a group of indicators that highlight a bar when VolSum indicates there is a high odds of price exhaustion. This alert is shown in the examples and is included in the template below.

VShift: Volume Shift Alert

For those who have long used simple moving averages of volume, I present an indicator I call VShift, which is a simple spread of two volume moving averages, the shift from below zero to above zero indicating a momentum change and marked by a small blue dot at the bottom of the chart.

Examples:

The following charts, a 532-tick and a 3-minute bar chart, show how the indicators might be interpreted.

original article: 20 May 2005, updated 8 Sep 2005

Ensign Software amg's VolSum and VShift

Ensign Software
amg's VolSum and VShift