Volume by Price
Introduction
Volume by Price is an indicator that shows the amount of volume for a particular price range. Volume by Price bars are shown horizontal on the left side of the chart to match up with price points. These color-coded bars divide volume based on up periods (green) and volume on down periods (red). Chartists can use Volume by Price to identify high volume price points that may provide support or resistance.
Calculation
Volume by Price calculations are based on the entire period displayed on the chart. A five month daily chart would be based on ALL five months of daily price data. A two week 30-minute chart would be based on two weeks of 30-minute price data. A three year weekly chart would be based on three years of weekly data. Volume by Price calculations do not extend beyond the historical data shown on the chart.
Volume is negative when the closing price moves down from one period to the next. Volume is positive when the closing price moves up from one period to the next.
The example above shows a Volume by Price calculation taken from the Nasdaq 100 ETF (QQQQ) from April 12th until September 15th 2010. Closing prices ranged from 42.47 to 50.42 during this period (50.42 - 42.47 = 7.95). Prices were sorted from low to high and then divided into 12 even blocks (7.95/12 = .6625). This example shows the first three price blocks (42.47 to 43.13, 43.14 to 43.80 and 43.81 to 44.46). Starting from the low (42.47), we can add the block size (.6625) to create the price blocks leading to the high. Only prices that fall within these blocks are shown. Add the volume for each close that falls with each price block to find the Volume by Price bars. Volume can then be separated into positive and negative volume.
The chart above plots Volume by Price for QQQQ during the entire period. The lowest three price blocks correspond to the spreadsheet example. Notice that the Volume by Price bars are divided into red and green to separate positive volume from negative volume. The longest Volume by Price bar extends from the fifth price block from the bottom (45.12 to 45.78). Despite the heaviest volume, positive and negative volume are pretty evenly split.
There are four steps involved in the calculation. All calculations are based on closing prices. 1. Find the closing high-low range for the entire period. 2. Divide this range by 12 to create 12 equal price blocks. 3. Total the amount of volume traded within each price block. 4. Divide the volume into up volume and down volume.
Volume is negative when the closing price moves down from one period to the next. Volume is positive when the closing price moves up from one period to the next.
The example above shows a Volume by Price calculation taken from the Nasdaq 100 ETF (QQQQ) from April 12th until September 15th 2010. Closing prices ranged from 42.47 to 50.42 during this period (50.42 - 42.47 = 7.95). Prices were sorted from low to high and then divided into 12 even blocks (7.95/12 = .6625). This example shows the first three price blocks (42.47 to 43.13, 43.14 to 43.80 and 43.81 to 44.46). Starting from the low (42.47), we can add the block size (.6625) to create the price blocks leading to the high. Only prices that fall within these blocks are shown. Add the volume for each close that falls with each price block to find the Volume by Price bars. Volume can then be separated into positive and negative volume.
The chart above plots Volume by Price for QQQQ during the entire period. The lowest three price blocks correspond to the spreadsheet example. Notice that the Volume by Price bars are divided into red and green to separate positive volume from negative volume. The longest Volume by Price bar extends from the fifth price block from the bottom (45.12 to 45.78). Despite the heaviest volume, positive and negative volume are pretty evenly split.
Interpretation
Volume by Price can be used to identify current support and resistance levels or estimate future support and resistance levels. Heavy volume at certain price blocks shows elevated interest levels. Keep in mind that there is a buyer for every seller. Therefore, it is sometimes difficult to determine the true bias behind volume. Regardless of the bias, price blocks with heavy volume mark levels with elevated interest that influence future supply or demand (a.k.a. resistance or support).
Long Volume by Price bars reveal areas of elevated interest. Long Volume by Price bars underneath prices should be watched as potential support during a pullback. Similarly, long Volume by Price bars above prices should be watched as potential resistance on a bounce.
Price breaks above or below Volume by Price levels can also be used as signals. A break above Volume by Price resistance shows strength because demand was strong enough to overcome a supply overhang. Similarly, a break below a long Volume by Price bar shows weakness because supply was ample enough to overwhelm demand.
Long Volume by Price bars reveal areas of elevated interest. Long Volume by Price bars underneath prices should be watched as potential support during a pullback. Similarly, long Volume by Price bars above prices should be watched as potential resistance on a bounce.
Price breaks above or below Volume by Price levels can also be used as signals. A break above Volume by Price resistance shows strength because demand was strong enough to overcome a supply overhang. Similarly, a break below a long Volume by Price bar shows weakness because supply was ample enough to overwhelm demand.
Volume by Price changes
Before looking at some examples, it is important to understand how Volume by Price works. Volume by Price can be used to identify current or future support or resistance. Current Volume by Price bars should not be used to validate past support or resistance levels because the indicator is based on all the price-volume data shown on the chart. This means six months of data for a chart that extends from January to June. It may appear as Volume by Price identified support in March, but keep in mind that the indicator data extends well beyond March, which is essentially the future. To effectively identify support or resistance in March, the chart needs to end at or before March, not after March.
The chart below shows Becton Dickinson (BDX) with Volume by Price over a six month period ending September. Looking at the chart, it appears that Volume by Price correctly identified resistance around 71-72 in June (red arrows). Notice that the longest bar covers this price area. There is one problem. This bar includes data from July to September, which would not have been available in June and is therefore not applicable.
To accurately use Volume by Price for a June forecast, we need a chart that ends in May. The second chart shows BDX from December to May, six months. A different picture of Volume by Price emerges now. The longest bars are in the upper 70s, not in the low 70s. Analysis should focus on the present or future when using Volume by Price bars.
The BDX chart above also highlights another nuance of Volume by Price. Big price gaps can produce Volume by Price bars that equal zero. This makes sense because Volume by Price equals zero when there are no closing prices within a specific price block. On the BDX chart below, the Volume by Price bar around 72 equals zero because of a closing gap from 73 to 71 in the third week of May. Keep in mind that Volume by Price is based on closing prices, not intraday prices. The open, high and low play no role in its calculation.
The chart below shows Becton Dickinson (BDX) with Volume by Price over a six month period ending September. Looking at the chart, it appears that Volume by Price correctly identified resistance around 71-72 in June (red arrows). Notice that the longest bar covers this price area. There is one problem. This bar includes data from July to September, which would not have been available in June and is therefore not applicable.
To accurately use Volume by Price for a June forecast, we need a chart that ends in May. The second chart shows BDX from December to May, six months. A different picture of Volume by Price emerges now. The longest bars are in the upper 70s, not in the low 70s. Analysis should focus on the present or future when using Volume by Price bars.
The BDX chart above also highlights another nuance of Volume by Price. Big price gaps can produce Volume by Price bars that equal zero. This makes sense because Volume by Price equals zero when there are no closing prices within a specific price block. On the BDX chart below, the Volume by Price bar around 72 equals zero because of a closing gap from 73 to 71 in the third week of May. Keep in mind that Volume by Price is based on closing prices, not intraday prices. The open, high and low play no role in its calculation.
Identifying Support
The chart for Netflix (NFLX) shows Volume by Price identifying support around 95-100 at the end of June. Notice that this is the longest bar. Also notice that NFLX is beginning a pullback so we can use Volume by Price to estimate support in the near future. The second chart shows NFLX with the yellow area marking Volume by Price support from the first chart. Support was expected in the 95-100 area and the stock reversed here in late July. Notice that volume surged in August to validate the reversal off support.
Identifying Resistance
The chart for Tyco Electronics (TEL) shows Volume by Price identifying resistance around 29 in mid June. Remember, the April break above this bar is not really a breakout because the current Volume by Price calculation extends from mid January to mid June. The longest bar marks current resistance in the 29 area. TEL is at its make-or-break point with prices near resistance. The second chart shows Volume by Price resistance from the first and the ultimate failure at resistance.
Support Breaks
A break below a long Volume by Price signals a victory for supply that can foreshadow lower prices. Long Volume by Price bars that are below prices show elevated interest areas and potential support. A break below this support zone signals a significant increase in selling pressure and lower prices are then expected.
The Sandisk (SNDK) chart shows a long Volume by Price bar marking support around 42-44 in mid August. Also notice that the stock forged at least three reaction lows around 42 from early July to mid August. This support (demand) zone is clearly marked. The second chart shows SNDK breaking below the previously identified Volume by Price support zone with high volume. Demand crumbled, supply won the day and prices moved sharply lower.
The Sandisk (SNDK) chart shows a long Volume by Price bar marking support around 42-44 in mid August. Also notice that the stock forged at least three reaction lows around 42 from early July to mid August. This support (demand) zone is clearly marked. The second chart shows SNDK breaking below the previously identified Volume by Price support zone with high volume. Demand crumbled, supply won the day and prices moved sharply lower.
Resistance Breaks
A break above a long Volume by Price bar signals an increase in demand that can foreshadow higher prices. Long Volume by Price bars that are above prices mark supply overhangs that demand has not been able to overcome. A break above this resistance zone signals strengthening demand and higher prices are expected.
The McDonalds (MCD) chart below shows a long Volume by Price bar around 69-69.5. Also notice that the stock met resistance in the 69-70 area from late April until June. A large Symmetrical Triangle could be forming on the price chart as MCD bounces above its prior low. A break above these resistance zones would show strength in demand and project higher prices. The second chart shows MCD breaking resistance in July and surging to new highs in August.
The McDonalds (MCD) chart below shows a long Volume by Price bar around 69-69.5. Also notice that the stock met resistance in the 69-70 area from late April until June. A large Symmetrical Triangle could be forming on the price chart as MCD bounces above its prior low. A break above these resistance zones would show strength in demand and project higher prices. The second chart shows MCD breaking resistance in July and surging to new highs in August.
Conclusions
Volume by Price is best suited for identifying present or future support and resistance. Don't go too far in the future though. One to four weeks is usually enough. The indicator marks potential support when prices are above and potential resistance when prices are below. These support or resistance levels can be enhanced by looking at the positive (green) and negative (red) volume within the Volume by Price bars. Long green portions reflect more demand that can enhance support. Long red portions reflect more supply that can augment resistance. It is important to confirm Volume by Price findings with other indicators and analysis techniques. Momentum oscillators and chart patterns are good complements to this volume based indicator.
SharpCharts
Volume by Price can be found in SharpCharts under "overlays". There are no parameters to be set. Actually, the parameters are based on the number of "periods" and the timeframe because Volume by Price is based on all the data displayed on the chart. Click here for a live example.
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