Volume-by-price is a metric that displays the amount of volume for a certain price range depending on closing prices. To correlate with these price ranges, volume-by-price bars are horizontal and presented on the left side of the chart. Chartists can see these bars as a single colour or two colours to distinguish between up and down volumes. This indicator may be used to detect high-volume price ranges to signal support or resistance by combining volume and closing prices. By default, StockCharts displays twelve Volume-by-Price bars, but users can change this number to suit their needs.
The volume price trend indicator is used to measure an asset’s demand and supply balance. The percentage change in the share price trend represents the relative supply or demand for a certain security, while the volume represents the force driving the trend. Most charting software packages include the VPT indicator.
Calculation
The estimates for Volume-by-Price are based on the whole time shown on the chart. Volume-by-Price would be calculated using ALL five months of daily closing data on a five-month daily chart, two weeks of 30-minute closing data on a two-week 30-minute chart, and three years of weekly closing data on a three-year weekly chart. You get my drift.
The computation is divided into four stages.
This example uses closing prices and the default parameter settings.
- Determine the high-low closing price range for the full time.
- Take this range and divide it by 12 to get 12 equal pricing zones.
- Add up the volume traded inside each price zone.
- Split the volume into positive and negative volumes (optional).
It’s worth noting that negative volume for a price zone is the sum of volume for all down days in that zone, and positive volume is the sum of volume for all up days in that zone. Volume-by-Price bars show the overall volume for each price zone. Volume may then be divided into two categories: positive volume and negative volume.
Interpretation
Volume-by-Price may be used to determine present support and resistance levels as well as to forecast future support and resistance levels. Price zones with high volume imply high levels of interest, which might impact future supply or demand (a.k.a. resistance or support). Long Volume-by-Price bars beneath prices should be kept an eye on as potential support during a retreat. Long Volume-by-Price bars above prices, meanwhile, should be monitored as possible resistance on a rally.
Nuances
It’s crucial to understand how Volume-by-Price works before looking at any instances. Volume-by-Price can be used to determine whether or not there is present support or resistance. Because the indicator is based on all of the price-volume data provided on the chart, current bars should not be used to justify previous support or resistance levels. For a chart that spans the months of January to June, this translates to six months of data. Although the indicator data appears to show support in March, keep in mind that the chart concludes in June, thus the indicator data goes well beyond March.
Chartists should also be aware that large gaps might result in bars that are equal to zero. This makes sense since when there are no closing prices inside a price zone, Volume-by-Price = 0.
Identifying Support
Volume-by-Price identifies support around 95-100 on the Netflix (NFLX) chart towards the end of June. This is the longest bar, as you can see. Also, because NFLX is starting to retreat, we may utilise Volume-by-Price to anticipate near-term support. The second chart depicts NFLX, with the yellow region indicating the first chart’s Volume-by-Price support. The price retreated in late July after finding support in the 95-100 region. It’s worth noting that volume spiked in August, confirming the reverse of support.
Support Breaks
A breach below a lengthy Volume-by-Price bar indicates increased supply or selling pressure, which may indicate lower prices ahead. Long bars below prices indicate regions of high interest and probable support. If this support zone is broken, there will be a considerable rise in selling pressure, and prices will fall.
In mid-August, a protracted Volume-by-Price bar marked support in the 39-43 range on the SanDisk (SNDK) chart. Also, from early July to mid-August, the stock made at least three reaction lows around 42. This demand (support) zone is clearly highlighted. SNDK breaks below the previously indicated Volume-by-Price support zone with heavy volume in the second chart. Demand collapsed, supply triumphed, and prices plummeted.
9 Kinds of Volume By Price Indicators
Before going down to the road of indicators, you must know the importance of high volume and low volume.
High Volume
- High volume shows that there is greater interest in the stock and that buyers and sellers are present.
- When a stock is in an uptrend and there is an increase in volume to go along with it, the stock will continue to rise.
- It means that a growing number of people are interested in purchasing that stock.
- Similarly, if a stock is in a downtrend and volume is increasing at the same time as the decline, the stock will continue to fall.
- It shows that a growing number of sellers are interested in selling that stock.
Low Volume
- Low volume suggests that there isn’t much interest in the stock.
- When a stock is rising but volume is declining, it means that buyers’ enthusiasm in the stock has waned and the uptrend is about to reverse.
- Similarly, if the price is down and volume is decreasing, it means that sellers’ interest in the stock has waned and the downtrend is about to turn.
Now that you’ve grasped the significance of high and low volume, let’s look at 9 different types of volume indicators that may assist traders in analysing volume in trading:
1. On-balance Indicator
On Balance Volume (OBV) is a volume indicator that adds up volume on up days and subtracts volume on down days to measure purchasing and selling pressure as a cumulative indication.
All of the day’s volume is termed up-volume when the stock closes higher than the previous closing. When a stock ends lower than the previous close, all of the volume for the day is termed down-volume.
When the security’s price closes up, the day’s volume is added to a cumulative total, and when the security’s price closes down, the day’s volume is subtracted.
– If today’s close is higher than yesterday’s close, OBV equals yesterday’s OBV + today’s volume.
– If the close of today is lower than the close of yesterday, then: Yesterday’s Volume – Today’s Volume = OBV
– If today’s close is the same as yesterday’s close, the OBV will be the same as yesterday’s OBV.
2. Volume RSI
The Volume RSI (Relative Strength Index) is a volume indicator that is similar to the Relative Strength Index except that instead of price fluctuations, up-volume and down-volume are employed in the RSI formula.
In the region of 0 to 100 percent, the volume RSI oscillates about 50% centre-line.
One approach to use this volume indicator is to trade on the indications given by the indicator’s crossings and the 50% centre-line around which it oscillates.
- When the Volume RSI reading exceeds 50%, it is considered bullish, implying that bullish volume outnumbers bearish volume.
- When the Volume RSI reading falls below 50%, it is deemed bearish, implying that bearish volume outnumbers positive volume.
3. Volume Price Trend Indicator
The volume price trend (VPT) indicator is a volume indicator that may be used to determine the price direction and strength of a stock.
The indicator is made up of a cumulative volume line that adds or subtracts a multiple of the percentage change in the trend of a share price and current volume based on the security’s upward or downward movements.
This indicator is similar to the on-balance volume (OBV) indicator in that it tracks cumulative volume and also informs traders about the money movement of an asset.
The VPT’s interpretations can be summarised as follows:
- The higher pricing trend is confirmed by a rise in price and volume.
- The declining pricing trend is confirmed by a reduction in price and volume.
- A negative divergence is an increase in price that is accompanied by a falling or flat volume trend, indicating that the downward price movement is weak and may revert.
- A positive divergence is a decline in price followed with an increasing or flat volume trend, indicating that the upward price movement is fragile and may reverse.
4. Money Flow Index
The Money Flow Index (MFI) is a volume and movement indicator that analyses both time and price to determine trading pressure – buying or selling.
It’s also known as volume-weighted Relative Strength Index (RSI), because it includes volume in addition to price, whereas RSI solely considers price.
MFI is calculated using the following formula:
- Typical Price = (High + Low + Close)/3
- Raw Money Flow = Typical Price x Volume
- Money Flow Ratio = (14-period Positive Money Flow)/(14-period Negative Money Flow)
- Money Flow Index = 100 – 100/(1 + Money Flow Ratio)
5. Chaikin Money Flow Indicator
The Chaikin Money Flow indicator is a volume indicator that may be used to estimate the amount of Money Flow Volume over a certain time period.
Money Flow Volume is added by Chaikin Money Flow for a specific look-back time, usually 20 or 21 days. Like an oscillator, this indicator swings above and below the zero line.
When the closing price is close to the high, greater accumulation occurs, according to this indication. When the closing price is close to the low, there is also more dispersion.
- Wait for the CMF to have a positive value to confirm the breakout direction of price movement. For example, if a price breaks higher through resistance, the CMF should have a positive value to confirm the breakout direction.
- When price hits higher highs into overbought zones, the CMF diverges with a lower high, which is known as negative divergence, signalling a sell signal.
- When price produces a lower low with the CMF diverging with a higher low with positive divergence, it is a CMF buy signal.
6. Accumulation/Distribution
The Accumulation Distribution Line is a volume indicator that shows how much money has flowed into and out of a company over time.
Strong purchasing pressure is indicated by a high positive multiplier with high volume, which drives the indication higher. A low negative number with high volume, on the other hand, suggests significant selling pressure, pushing the indicator down.
This indicator attempts to discover positive or negative divergences in price and volume data, which may be used to predict future price changes.
A trader who is building up a stock portfolio is just buying shares. A trader who shares stock with the market is also selling. As a result, the accumulation/distribution indicator assesses demand and supply, influencing price movement.
7. Ease of Movement
Another key volume indicator is the Ease of Movement indicator, which measures how easily a stock price swings between various levels depending on volume patterns. An easy moving price is one that maintains its trend for a set amount of time.
This indicator performs well in tumultuous markets where patterns are difficult to discern.
This indicator works best for longer time frames, such as a daily chart, since it detects trends based on volume averages and gives buy and sell signals when it crosses the zero centreline or creates bearish or bullish divergences.
8. Negative Volume Index
The Negative Volume Index (NVI) is a cumulative indicator that determines when the smart money is active based on volume changes.
This indication is based on the idea that clever money is active on days when volume is low and not-so-smart money is active on days when volume is high.
9. Volume Weighted Average Price
When both price and volume are taken into account, the volume-weighted average price reflects the average price an item has traded at throughout the trading session.
This indication displays the current market value of the security, indicating if it was purchased or sold at a reasonable price. Traders use the VWAP to filter out market noise and determine what prices buyers and sellers are ready to pay for a transaction. When the VWAP rises or the price crosses over the VWAP line, it indicates that the market is increasing. When the VWAP falls or the price falls below the VWAP line, it indicates that prices are falling.
FAQs
Que.1 What is the best way to utilise volume by price indicator?
Ans. The full time on the chart may be used to determine Volume by Price. On a seven-month daily chart, for example, Volume by Price will use all seven months of the closing price. The Volume by Price indicator, which is based on a two-year weekly chart, will also display two years of closing prices.
Que.2 What effect does pricing have on volume?
Ans. If the majority of the volume occurs at the bid price, the price will fall, and the higher volume indicates that sellers are eager to sell the stock. If the majority of the volume was traded at the ask price, the stock price will rise (due to demand and price availability).