Volume Rate of Change
What is the Volume Rate of Change?
The Volume Rate of Change (VROC) is a technical analysis indicator that measures the rate at which trading volume changes over a specified period. It helps traders and investors identify volume trends and determine if a security is experiencing a rising or declining volume trend. This indicator is handy in predicting price movements and confirming price trends, as it is closely associated with the price rate of change (ROC), which reflects the rate of change of an asset’s closing price.
Importance of Volume Rate of Change
The Volume Rate of Change is crucial for traders and investors, as it can provide valuable insights into the strength of a price trend. By analyzing the VROC, market participants can assess the momentum behind price movements, which can help make more informed trading decisions. A rising VROC indicates increasing buying pressure, suggesting that the price is more likely to continue moving upward. Conversely, a falling VROC signifies increasing selling pressure, implying that the price may continue to decline.
How to Calculate Volume Rate of Change
To calculate the Volume Rate of Change (VROC), follow these steps:
- Choose a time period for your analysis (e.g., 10 periods, 20 periods, etc.).
- Calculate the difference between the current trading volume and the chosen period.
- Divide the difference by the trading volume from the selected period ago.
- Multiply the result by 100 to express the VROC as a percentage.
The formula for VROC is as follows:
VROC = [(Current Volume - Volume n Periods Ago) / Volume n Periods Ago] * 100
Let’s assume you want to calculate the VROC for a 5-period analysis. The trading volumes for the last 6 periods are as follows:
- Current Volume: 150,000
- Volume 5 periods ago: 100,000
Now, we will use the VROC formula:
VROC = [(150,000 - 100,000) / 100,000] * 100
VROC = [50,000 / 100,000] * 100
VROC = 0.5 * 100
VROC = 50%
In this example, the Volume Rate of Change is 50%, indicating an increase in trading volume compared to the volume 5 periods ago.
Example scanners and strategies that use Volume Rate of Change
Volume Rate of Change Interpretation
Divergence and Confirmation
Traders and investors can use the VROC to identify divergences and confirmations in the market. Divergence occurs when the price moves in the opposite direction of the VROC, which could signal a potential reversal in the trend. Conversely, confirmation happens when the price and VROC move in the same direction, supporting the continuation of the current trend.
Trading Strategies Based on VROC
Traders can employ various trading strategies using the Volume Rate of Change indicator. Two common methods include reversal trading and breakout trading.
In reversal trading, traders look for divergences between the VROC and the price to identify potential trend reversals. For example, if the price is making higher highs while the VROC is making lower highs, this could indicate a bearish divergence, suggesting that the uptrend may reverse. Conversely, if the price is making lower lows while the VROC is making higher lows, this could signal a bullish divergence, implying that the downtrend may reverse.
Breakout trading involves entering a trade when the price moves beyond a specific level, accompanied by a significant increase in trading volume. Traders using the VROC can identify breakouts by looking for a sharp rise in the indicator’s value, indicating a strong surge in trading activity. This surge in volume can confirm the breakout, increasing the likelihood that the price will continue moving toward the breakout.
For example, if the price breaks through a resistance level with a corresponding spike in the VROC, this could signal a valid bullish breakout. Traders can enter a long position, expecting the price to continue its upward trajectory. Conversely, suppose the price falls below a support level with a significant increase in VROC. In that case, this could indicate a valid bearish breakout, and traders can enter a short position, anticipating a continued downward trend.
The Bottom Line
The Volume Rate of Change is a powerful technical analysis tool that helps traders and investors identify volume trends and assess the strength of price movements. By understanding how to calculate and interpret the VROC, market participants can employ various trading strategies, such as reversal and breakout trading, to make more informed decisions in the market. As with any technical indicator, combining the VROC with other indicators and analysis methods is essential to increase the probability of successful trades and minimize potential risks.