Monday, July 9, 2012

Volume Rate of Change

MetaStock SPRS Series - Week 76 - TechniTrader® Stock Discussion for MetaStock Users - Volume Rate of Change - July 9, 2012
By: Martha Stokes C.M.T.

I teach volume indicators frequently because most traders emphasize price and time indicators, and neglect volume and time indicators.

In the modern electronic automated stock market, neglecting to pay close attention to volume as well as price is one of the primary reasons most retail traders have lackluster profits and whipsaw trades.

An easy to use volume indicator I would like to introduce to you today is Volume Rate of Change.

Volume Rate of Change can be classified with Velocity types of indicators. Like Average True Range which reveals price variance also called volatility, Volume Rate of Change exposes the variances of volume over time.

Since this indicator can be adjusted to various time periods for different trading styles, it is extremely useful in as a general “volatility” or velocity indicator for volume.

High Frequency Traders move price and volume suddenly and hugely. Their activity often prompts other market participant groups to jump in and trade the stock as well.

Day Traders: Identifying sudden volume volatility is important to tracking the High Frequency Trading Firms, which is where the bulk of the day trading profits occur nowadays.

Swing Traders: Often the first sign of a momentum move is a surge of volume. Volume Rate of Change can reveal underlying volume activity during a consolidation especially during bottoms, when price often doesn’t show extreme low volatility patterns in ATR.

Position Traders: Volume Rate of Change can help you see spikes of volume during a platform, which can assist you in determining what direction price will breakout.

Chart 1

Volume at Price is shown above in the bottom chart window. It is a simple line indicator that I frequently use on Volume bars. It is especially useful during consolidations and platforms when price is holding steady and price trend and volatility indicators such as ATR are functioning ideally.

Surges of volume in this pattern expose the strength of the upside even during the platform phases for this stock. This is a position style trade that continued moving up because volume was favoring the upside.

During volatile price action Volume Rate of Change can expose extreme patterns, which warn that the run is exhausting for better exits on swing trades.

Volume Rate of Change should be adjusted for settings that work for your individual trading style. Experiment with the settings to achieve a sensitivity that exposes volume surges appropriately. The setting above is a 12 period setting which is useful for swing and position trading. Day traders will want to use different settings depending upon their type of day trading.

Using all of the wonderful tools in MetaStock will help you make your trading easier, faster, more consistent, and much more enjoyable. Try VROC to see how it can improve your analysis of volume. It is easy to interpret and use with other volume indicators. It can be set separately as I have in its own chart window or applied with another volume indicator in the same window.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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