Volume ROC

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Introduction

In order to understand Volume Rate of Change, let us have a brief introduction of Rate of change. The basic use/purpose of Rate of Change is to determine the pace at which a Stock changes its Price/Volume over a definite period of time. Rate of Change is commonly used to determine Momentum. The outcome of Rate of Change can be expressed in terms of a ratio, depicting changes in one variable in relation to changes in another matching variable. Graphically, Slope of a line is often used to draw Rate of Change.

Volume and Price are often used as the parameters to determine the direction of a trend. In Technical Analysis, Volume Rate of Change (VROC) is utilized to form an estimate of Volatility in a Security’s Volume. VROC clearly depicts the direction of a trend i.e. Positive or Negative. Volume Rate of Change is often used to confirm price activity and discover divergences in Stock’s Volume. A Security’s Price Changes due to a shift in the Volume of its Shares traded. Volume Rate of Change detects that shift and also confirms it to be either positive or negative via Graphical Formations like Peaks, Breaches, and Foundations etc. VROC is the handiest tool to determine a stock’s ability Passover certain resistance/support. It can also be used to determine trend changes as well as trend strengths.

Calculation

Volume Rate of Change can be determined in terms of a Percentage. In order to calculate VROC %, use the following formula:

[{Volume CURRENT – Volume PREVIOUS}/ Volume PREVIOUS] * 100

VROC % is frequently known as the Heartbeat of Market (in terms of Volume). Reason behind it is that it shows relative volume of the market. Normally, the length of Period for Volume Calculation is 14 days. The Previous Value can be for any period subject to the interest of a Trader. The length is a rough estimate that can be altered in any direction without any hesitation.

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Specifications

Calculation Period plays a critical role in every Indicator. Same is the case with Volume Rate of Change. In order to determine stable results 20 to 30 bars must be selected. Reason behind it is that if we take 10 or 15 bars, the result will be an unsmoothed data with lots of ups and downs. This makes the decision making harder. Technical Analysis and its Indicators are used to simplify decision making. So, instead of using Noisy Lines (Short Period), always prefer a stable period of time to get desired Volume Figure.

VROC measures the change in Volume by evaluating Current Volume and Volume “N” days ago differences. If the Current Volume is greater than Previous Volume, a Positive value will be the outcome of the Formulae. This means that a strong trend prevails in the market relating to Bearish/Bullish Market. But in case the Price of VROC is negative, this indicates a possible change in the direction of trend currently prevailing. Dividing the Difference of Current and Previous Volume by Previous Volume will gives us the relative speed at which the Volume is changing.

Just like a Volume Oscillator Indicator, Volume Rate of Change tends to fluctuate around a central line, commonly known as zero line. When the Volume rises, the value of VROC is plotted above the zero line and vice versa. Similarly, when the Price of a Security falls, the VROC moves down. With a minor change in Volume, the VROC slope tends to reach central line. But with a major change in Volume, the Volume Rate of Change shows a breakout. A breakout helps in determining a short term extreme position. Overbought and Oversold moments often lead to sudden Trend Reversals. VROC helps in choosing the right time to exit and enter the market. With the help of VROC, all you have to do is to see whether Slope of VROC is above or below central line i.e. zero line. If it is above the zero line then an uptrend prevails and vice versa. Every Trader must make decisions in the direction of the trend prescribed by Volume Rate of Change. If the trend is upward and the Volume Rate of Change turns upward then go long and vice versa.

Volume Indicators are closely related to Momentum. Momentum tends to measure the level of reprehensible acquisitiveness or fear prevailing in the market. The ups and downs of market can be determined by using Oscillators. Volume Rate of Change helps in determining the pace at which the Momentum will be shifting from one side to another. Momentum would be positive if the volume today is greater than the volume ‘n’ days ago. Calculating VROC for various periods and then plotting them graphically, one can easily determine whether the momentum is falling or rising.  Thus, we can say that both Momentum and Volume Rate of Change help in anticipating a mass optimism or pessimism in the market. By using Volume Rate of Change, the trader can not only determine the direction of trend but he/she can also measure the pace at which it is trending.

Advantages of Volume Rate of Change

  1. Volume Rate of Change manifests the speed at which a trend is moving or deviating. This is the ultimate goal of ever trader i.e. to anticipate future trend and to determine the pace at which the trend will move. Reason behind it is that, sudden changes in price of securities can give a lot or take a lot. So, VROC evaluates the peaks, bottoms and breakouts of a Security through a Slope of a Line.
  2. Volume Rate of Change is the only indicator that gauges a security’s Volume Differences. VROC helps traders in determining a stock’s ability to crossover, support/resist, along with the trend changes and the strength of a trend.
  3. Volume Rate of Changes gives a clear picture of the Trend prevailing in the market i.e. Bullish/Up Trend or Bearish/Down Trend.

Disadvantages of Volume Rate of Change

  1. Critics believe that biggest disadvantage of Volume Rate of Change is that it is blind to current price situation of a commodity. Volume Rate of Change neither takes price into consideration nor is it affected by a change in price.
  2. It is necessary that a long period is taken into consideration in order to smooth the data otherwise the data will be a mere zigzag. In a zigzag course, the decision making is neither simplified nor trusted instead it is impossible to predict trend on short periods.