You might not know this but the broader trading market can see price fluctuations as high as 25% within a single day. This intense volatility presents both a challenge and an opportunity for traders aiming to take advantage of swift market shifts.
However, one technical tool that traders can rely on is the Volume Rate of Change (VROC). This technical analysis tool helps traders assess market momentum by measuring the percentage change in trading volume over a specified period.
Essentially, understanding VROC can help traders anticipate potential price reversals, breakouts, or the continuation of trends, giving them a competitive edge in decision-making.
In this article, we’ll explore how VROC works, its calculation, key use cases, and strategies for incorporating VROC into a trading plan.
Read Also: How to Use On-Balance-Volume (OBV) in Crypto Trading
Key takeaways
- VROC measures volume momentum, offering insights into buying/selling pressure.
- High VROC confirms trends, while divergences may signal reversals.
- VROC works best with other indicators, like RSI or moving averages, for stronger signals.
- Limitations include false signals in low-volume markets and no directional bias in price movement.
What is Volume Rate of Change (VROC)?
In trading, the Volume Rate of Change (VROC or Volume ROC) is a momentum indicator that tracks the rate of volume change over a specific period. According to various studies and industry observations, it is estimated that around 80% to 90% of day traders eventually quit within their first year.
One of the major reasons is the lack of clear trading strategies. However, this doesn’t have to be your case as the knowledge of VROC can be a game changer.
The technical indicator helps traders identify shifts in market sentiment and evaluate the strength or weakness of price movements through fluctuations in trading volume. Additionally, VROC functions as a momentum oscillator, fluctuating around a zero line.
Positive values indicate an increase in volume compared to the previous period, while negative values suggest a decrease. Furthermore, this indicator is valuable for predicting price movements and confirming price trends, as it is closely linked to the Price Rate of Change (ROC), which measures the rate at which an asset’s closing price changes.
By analyzing the volume shifts alongside price changes, traders can gain deeper insights into the strength of a trend or anticipate potential reversals.
Moreover, unlike the price rate of change (Price ROC), VROC focuses on volume rather than price. By highlighting volume trends in either an upward or downward direction, traders can use this information to better analyze price action.
How to Calculate VROC
The Volume Rate of Change (VROC) indicator is generated by comparing the change in trading volume over a given period to the volume from a specified earlier trading session. To calculate the Volume Rate of Change (VROC), follow these steps:
1. Select a specific time period for analysis (e.g., 10 periods, 20 periods, etc.).
2. Subtract the trading volume from the chosen period ago from the current trading volume.
3. Divide the result by the trading volume from the same selected period ago.
4. Multiply the result by 100 to express the VROC as a percentage.
Formula:
VROC (%) = [(Current Volume – Volume n periods ago) / Volume n periods ago] * 100
This will give you the VROC, which indicates the percentage change in volume over the chosen period.
For example, let’s assume you want to calculate the Volume Rate of Change (VROC) for a 5-period analysis, with the following data:
- Current Volume: 150,000
- Volume 5 periods ago: 100,000
Now, using the VROC formula:
VROC = [(Current Volume – Volume 5 periods ago) / Volume 5 periods ago] * 100
= [(150,000 – 100,000) / 100,000] * 100
VROC = [50,000 / 100,000] * 100
= 0.5 * 100
VROC = 50%
In this example, the Volume Rate of Change is 50%, indicating that trading volume has increased by 50% compared to the volume 5 periods ago. Furthermore, when plotting the Rate of Change (ROC) of volume on a chart, two lines are displayed.
For example, in the chart above, number 1 (green) represents the Volume ROC line, while number 2 (red) represents the Average of the Volume ROC line.
If the Volume ROC line is above the average line, it signifies an increasing volume trend, indicating a strong trend. Basically, a bullish price trend is indicated when the Volume ROC line is above its average line, while a bearish trend is identified when the price trend is downward but the Volume ROC line remains above its average line.
Optimal VROC Settings
Choosing the right period for VROC calculations is essential to balance sensitivity and reliability. Common settings include:
- Short-Term Trading: For short-term traders, a 10- or 14-period VROC is popular, as it reacts more quickly to volume changes.
- Medium to Long-Term Trading: A 20- or 30-period VROC is preferred for longer-term strategies, smoothing out short-term fluctuations.
While shorter VROC settings are more sensitive, they are also prone to noise and false signals. Conversely, longer settings provide more stable signals but may lag behind rapid market changes.
“The goal of a successful trader is to make the best trades. Money is secondary.”
Importance of Volume in Trading
Volume is one of the most critical aspects of technical analysis. While price movements indicate market direction, volume confirms the strength of that movement.
A price move supported by high volume is often considered more significant and likely to continue, whereas a move on low volume may lack momentum and could reverse. For instance, many breakouts from key moving average indicators, such as the death cross, often come with a significant increase in trading volume.
This is because crossing such a critical technical level prompts many traders to adjust their positions at the same time. However, if a death cross or similar price-based indicator is not accompanied by a sharp increase in volume, it suggests that a breakout in price is less likely to occur.
On the other hand, periods of low trading volume can still lead to sharp price movements, as even small trade orders can significantly impact the price due to limited liquidity. As a result, many trading strategies incorporate one or more volume indicators alongside price indicators to confirm or invalidate a trading signal derived from price analysis.
High Volume: Suggests strong buying or selling pressure, often accompanying major price shifts.
Low Volume: Implies market indecision or consolidation.
By focusing on the VROC, traders can better gauge whether a trend is likely to continue or reverse based on the changing level of market participation.
How VROC Enhances Trading Strategies
VROC helps traders assess whether volume trends align with price trends, offering more informed trading decisions. Here’s how VROC can enhance different trading strategies:
Confirming Price Breakouts
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Breakout trading entails initiating a trade when the price surpasses a defined level, accompanied by a substantial increase in trading volume. Traders using the Volume Rate of Change (VROC) can spot breakouts by monitoring for a notable spike in the indicator’s value, which signals a significant uptick in trading activity.
A rising VROC during a breakout suggests high conviction among traders, increasing the likelihood that the price will continue moving upward. Additionally, breakouts above key resistance levels are often viewed as bullish signals.
In this case, traders can take a long position, anticipating that the price will maintain its upward trend. However, traders need volume confirmation to ensure the breakout is genuine.
On the other hand, if the price drops below a support level while experiencing a significant rise in VROC, this may suggest a legitimate bearish breakout, prompting traders to enter a short position in expectation of a further downward movement.
Reversal Trading
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In reversal trading, traders seek divergences between the VROC and the price to spot potential trend reversals. For instance, if the price is reaching higher highs while the VROC is registering lower highs, this may indicate a bearish divergence, suggesting a possible reversal of the uptrend.
Conversely, if the price is forming lower lows while the VROC is recording higher lows, this could signify a bullish divergence, indicating that the downtrend may be poised to reverse.
Spotting Exhaustion
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A sharp increase in VROC, particularly after a sustained trend, can signal exhaustion. Traders might interpret a spike in volume as the last wave of buyers or sellers entering the market, leading to a reversal as the trend becomes overextended.
Anticipating Continuations
A steady increase in VROC during an uptrend or downtrend suggests sustained interest and activity, making it more likely the trend will continue.
VROC in Different Market Conditions
knowing how VROC behaves in different market conditions is crucial for using it effectively.
Bull Markets
In a bull market, VROC typically rises alongside price increases as traders pile into assets hoping to capitalize on gains. Higher volumes often signal confidence, and a rising VROC indicates growing momentum.
However, if VROC declines while prices rise, this divergence may signal that the trend is losing steam.
Bear Markets
In bear markets, VROC can highlight spikes in selling pressure as volumes increase during price drops. A surge in VROC during a sharp decline suggests panic selling, while a falling VROC amid a downtrend can indicate that the selling is slowing, possibly leading to consolidation or a reversal.
Sideways or Range-Bound Markets
In range-bound markets, volume typically decreases, and VROC reflects this by remaining flat or negative. Traders often look for sudden spikes in VROC to signal potential breakouts from the range.
“There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.”
Using VROC in Combination with Other Indicators
VROC is rarely used in isolation. Combining VROC with other technical indicators enhances its effectiveness.
VROC + Relative Strength Index (RSI)
RSI measures price momentum, while VROC measures volume momentum. When both indicate strong buying or selling pressure, the probability of a successful trade increases.
For instance, if RSI shows overbought conditions but VROC is still rising, traders might avoid shorting until VROC shows signs of declining.
VROC + Moving Averages
A moving average can help smooth out VROC readings and filter out noise. By applying a moving average to VROC, traders can identify sustained volume increases or decreases, which may signal the start of new trends.
VROC + Bollinger Bands
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Bollinger Bands help traders identify periods of high or low volatility. By adding VROC, traders can confirm whether volume supports price movement when the price breaks out of the bands, signaling a higher likelihood of trend continuation.
Benefits of Combining VROC with Other Indicators
Combining the VROC with other indicators offers several advantages, including:
- Better Understanding of Volume: It provides insights into the volume driving price movements, allowing traders to better assess market momentum.
- Improved Interpretation of Price Action: This combination aids traders in interpreting price action across various market conditions, making it easier to identify buying and selling pressure, as well as potential accumulation or distribution phases.
- Development of Trading Strategies: The integration of VROC with other indicators can facilitate the creation of a trading strategy with clearly defined entry and exit criteria.
Limitations of VROC
While VROC is a powerful tool, it has its limitations:
False Signals: VROC can generate false signals, particularly in low-volume markets where small changes in volume can lead to misleading spikes.
Lagging Indicator: VROC may sometimes lag behind price movements, especially when using longer periods.
No Directional Bias: VROC measures the rate of volume change but does not indicate the direction of price movement. A high VROC could occur in both bullish and bearish markets.
Not a standalone indicator: The VROC should not be relied upon alone; it needs to be used alongside other indicators or price action analysis to effectively gauge market momentum. Additionally, it does not indicate when to enter or exit a trade and should be combined with other analytical tools to develop a comprehensive trading strategy.
How does VROC differ from other volume indicators?
The VROC stands out from other volume indicators because it specifically measures the rate of change in volume over a specified time frame compared to a previous period. Unlike indicators such as the money flow index (MFI), negative volume index (NVI), and positive volume Index (PVI), which incorporate both volume and price data in their calculations, the VROC is solely based on volume data.
Essentially, it functions as a volume-exclusive indicator that simply tracks the rate of change in trading volume. Also, note that variations of the VROC may be found across different trading platforms, as various traders and developers customize indicators to meet their specific trading requirements.
It’s possible to encounter multiple versions of the VROC within the same platform. For instance, on TradingView, in addition to the standard VROC, there is an alternative known as Close VROC.
How Can Beginners Effectively Incorporate VROC into Their Trading Strategies?
To effectively integrate the VROC into their trading strategies, beginners should first familiarize themselves with the indicator and comprehend its functionality. Once they have a solid understanding, they can determine how to incorporate it into their trading approach.
For traders who emphasize price action analysis, the VROC can be utilized to gauge buying and selling pressures in the market and to identify when institutional investors are accumulating or distributing their positions. Additionally, they can leverage divergences between the VROC and price movements to spot potential market reversals.
For those who prefer using multiple indicators, the VROC can enhance their existing toolkit by offering insights into market momentum based on volume changes. Ultimately, it is important for traders to develop a well-defined strategy and conduct thorough backtesting before implementing it in live market conditions.
“Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets.”
Why VROC is Important in Financial Markets
The VROC plays a crucial role in financial markets as it aids in assessing the strength of price trends. According to Researchgate, an incredible 90% of traders ultimately lose money.
However, mastering VROC could change your fortune. This is because traders and investors use it to evaluate the strength or weakness of price movements based on variations in trading volume, which can provide insights into market sentiment.
A rising VROC indicates momentum in the direction of the price movement, signifying increased buying pressure during an uptrend, heightened selling pressure in a downtrend, and potential accumulation or distribution in a sideways market.
In essence, the VROC is vital for tracking volume trends, helping traders and investors determine whether an asset is experiencing increasing or decreasing volume. It can also be used in conjunction with the price ROC, which measures the rate of change in an asset’s closing price, to enhance trading decision-making.
Conclusion: Is VROC a Reliable Indicator?
The Volume Rate of Change (VROC) is an essential tool for traders looking to gauge market momentum based on volume. By measuring the percentage change in volume over time, VROC provides insights into the strength of buying or selling pressure.
When used alongside other technical indicators, it enhances the trader’s ability to confirm trends, spot reversals, and anticipate breakouts. While it has its limitations, VROC remains a valuable addition to any trader’s toolkit, helping to provide a fuller picture of market sentiment and participation.
As always, testing VROC across different timeframes and market conditions is key to unlocking its full potential in your trading strategy. By mastering VROC and integrating it into your broader analysis, you can improve your decision-making process, increase the accuracy of your trades, and stay ahead in fast-moving markets.
FAQs
To calculate the Volume Rate of Change (ROC), divide the change in volume over the last n periods (days, weeks, or months) by the volume from n periods ago. This provides the percentage change in volume over that time frame.
When the ROC line is above its average line, it suggests that the volume trend is strengthening. If the price trend is bullish and the volume ROC is above its average line, it signals a strong upward trend. Conversely, if the price trend is bearish while the volume ROC is still above its average line, it is viewed as a strong bearish signal.
In trading, VROC confirms trends, identifies potential reversals, and signals market exhaustion or continuation.
The optimal VROC settings are: Short-term traders use a 10- or 14-period VROC, while long-term traders prefer 20- or 30-period settings.
