Volume Effectiveness

20 mars 2021

I have been trying to work with volume as an indicator for quite some time, as it holds qualities as a 'leading indicator'.
However, please note that any indicator which to some extent predict a future trend has its issues as it can be misleading.
But, in some datasets in a selected timeframe the leading properties of volume as an indicator are useful.

So this script is not too complicated. It shows a numeric which resembles the 'effectiveness of volume' in moving price.

For example, if a small volume creates a large price change - the Volume Effectiveness indicator will be high and show a spike
Whereas, if a large volume creates a small price change - the Volume Effectiveness indicator will be low

I used 3 metrics to represent Volume Effectiveness (these are different colors on the bar chart)
One price difference is the absolute(high - low) for each bar
Another is the absolute(open - close)
The 'open-close' is smaller than the 'high-low', so note this when viewing the bar charts

The final metric depends on if the open is greater than the close or vice-versa
But it considers the 'absolute(high-low)' and the difference between the open and the high (or low) and the close and the low (or high)
So the final metric is the largest of the 3 metrics and is generally the most useful of the 3 however, the other 2 are displayed to provide a better understanding of what 'Volume Effectiveness' displays

Note, I use absolute values so they are only positive, i.e. there are no negative values to represent a price drop within a bar

So, why is this indicator useful - its because volume is a leading indicator

A decreasing volume tends to suggest a price change is coming
Also, when the volume within a bar is very small, its Volume Effectiveness tends to go very high
That means a small trade volume creates a relatively large change in price
This is ideal conditions for a big pump (or big dump - although this indicator seems to work better before pumps)

A large spike in the Volume Effectiveness is commonly/sometimes preceding a big pump

So watch this indicator - and if there is a big spike - evaluate other market conditions to consider getting into position

Large spikes in the Volume Effectiveness can precede big price changes and therefore can provide a leading indication before a pump or dump

Timeframe is important - I found on the daily timeframe this indicator did not provide sufficient lead to be useful. Similarly on the <15min timeframe the spikes were not highly correlated with pumps/dumps

However, in medium timeframes (15mins, 1hour, 4hours) this indicator can be useful for predicting sizeable price changes.