Hi Fellow Trader,
Happy New Year!
And to all non-Chinese friends, I hope you have a nice festive holiday break.
To start the new year off, I like to share how I use Volume-on-Price indicator in trading. I have been often asked how the indicator works, what is it used for, etc. So, I thought it be good to write an article about it.
Volume-on-Price is an indicator that shows the trading activity over a specific time period at specific price level. The indicator is plot on the left vertical axis as horizontal histogram to reveal significant price level based on volume.
Calculations are based on the running total volume for the specified period, e.g. for a daily chart displaying 6-month data, the total running volume for the 6-month is used for the calculation.
The number of histogram bar is set at 100 by default in Shareinvestor Station. This parameter may be adjusted to suit traders’ preferences. The higher the parameter figure, the narrower the histogram and hence the price range.
The calculations for a 6-month daily chart are as follows:
- Identify the high-low range for the closing price for the entire 6-month period.
- Divide the range by 100 to create 100 equal price zones.
- Total the amount of volume traded within each price zone.
Volume-on-Price can be used to identify current support and resistance levels as well as estimate future support and resistance levels. Price zones with heavy volume are of interest as they represent strong trading commitment and thus likely to influence future support or demand.
Chart A shows the 7-month data of Sunpower from Jun to Dec 2018. The high volume areas were identified at 0.335, 0.410 and 0.525. These are the potential overhead resistances, the most significant of which is at 0.410 with the longest histogram bar.
Chart B shows the break through the resistance at 0.335. The move was validated by the surge in volume. However, it stalled at 0.410 level as expected. This was followed by low volume pullback which was a healthy sign. On 7 Feb 2019, we witnessed another attempt at the resistance at 0.410 and was effectively taken out the next day, 8 Feb 2019. A break above 0.410 signals increasing buying pressure which indicates higher prices to come as the stock is now in a low-volume area.
The next significant resistance is at 0.525.
Chart C also shows a moderately long histogram (marked “X”). This is due to the inclusion of volume of the breakout bar. This may provide a moderate support for future upward move.
VOP indicator can be found in Shareinvestor Station under “Native”.
See Diagram A & B.
Volume-on-Price is a useful tool in identifying key Support / Resistance levels as it is visually appealing. However, it is important not to use current bars to validate past support and resistance levels because the calculation is based on overall volume data shown on the chart. Chart C shows the inclusion of newer bar (breakout bar) into the VOP calculation helps to illustrate this point.
Hope this simple article gives you a better understanding.
Till we meet again, Happy Trading!