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
- 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.
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.
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
- 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.
- 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.