Published on: October 8, 2024
In technical analysis, volume is an important indicator that provides insights into market activity and sentiment. While absolute volume data tells traders how many shares are traded within a specific time frame, Relative Volume (RVol) enhances this data by comparing the current volume to a historical average, helping traders make more informed decisions.
What is Relative Volume (RVol)?
Relative Volume (RVol) is a dynamic measure that shows how today’s trading volume compares to a specific average, typically over a defined historical period. It acts as a ratio, indicating whether current trading activity is above or below the norm. The formula for RVol can be summarised as:
For example, if a stock’s RVol is 2, it means that the current trading volume is twice the average volume seen over the comparison period. If the RVol is 0.5, it indicates that trading activity is half of the usual.
The idea behind RVol is rooted in the belief that spikes or drops in trading volume often precede significant price movements. High RVol indicates increased interest in a stock, potentially signalling a breakout or breakdown, while low RVol may imply a lack of interest or consolidation.
Volume vs. Relative Volume: The Key Differences
Volume:
Volume, in its simplest form, refers to the number of shares traded during a specific period, such as a day or hour. It’s an absolute measure that doesn’t take into account historical norms. High volume is often seen as a sign of high activity, while low volume can imply a lack of market interest. However, interpreting standalone volume data can be challenging without context.
Relative Volume (RVol):
Relative Volume, on the other hand, provides that much-needed context. It answers the question – “Is today’s volume significant compared to the stock’s historical trading activity?”
By comparing current volume to its average, RVol helps traders see if the market is unusually active or quiet, making it a more insightful indicator.
For example, a stock with 1 million shares traded might seem highly active, but if its average daily volume is 2 million, then the RVol would indicate that today’s activity is below average. Conversely, a small-cap stock with 200,000 shares traded could show a high RVol if its typical average is only 50,000 shares.
How to Use RVol in Trading
Relative Volume can be used in several ways to enhance decision-making:
1. Identifying Breakouts and Breakdowns:
When RVol spikes, it suggests a significant increase in trading activity, often hinting at a potential breakout (upward price movement) or breakdown (downward price movement). By observing RVol in conjunction with price action, traders can more effectively time their entry or exit.
2. Validating Price Trends:
Price movements accompanied by high RVol are more likely to be sustainable than those with low RVol. If a stock is trending upwards but RVol is declining, it could signal a weakening trend. On the other hand, rising prices with high RVol suggest strong momentum.
3. Spotting Reversals:
RVol can also act as an early warning signal for reversals. When a stock is experiencing low RVol during a prolonged trend, it may indicate that traders are losing interest, increasing the chance of a reversal.
RVol on Zone Web: Applying an Average for Smarter Trading
In the Zone Web platform, RVol has an option to apply an average, enhancing its practical use. This feature allows traders to smooth out the fluctuations in volume data, offering a more stable view of market activity.
Advantages of Applying an Average to RVol:
1. Smoothed Analysis:
Volume can be erratic, especially in low-cap stocks or illiquid markets. Applying an average removes some of the “noise” caused by these erratic volume spikes and focuses on more meaningful trends.
2. Better Trend Identification:
Averaging RVol helps identify trends more reliably. Sudden spikes in RVol can sometimes be false signals. By applying an average, you ensure that only consistent increases in volume catch your attention.
3. Reduction of False Positives:
When trading on volume spikes alone, traders often fall prey to false breakouts. The average option on RVol acts as a filter to ensure that these spikes are meaningful, reducing the risk of entering a trade prematurely.
Scanner for RVol in RZone
Traders can use RVol filters to narrow down potential trading opportunities.
For example, a trader might scan for stocks with RVol above average line pointing to possible breakout scenarios.
Follow these steps:
- Go to System Builder
- Create a New System and Name it (I named it as RVol)
3. Add Conditions – Search RVOL
4. Select RVOL above Average Line (avg line) and Add it
5. In Expression, write 1 and Save. (Traders also have the option to add other indicators or patterns with RVol)
Now, you can run this scanner and filter the stocks.
To summarise, Relative Volume (RVol) is an indispensable tool for any trader looking to add an extra layer of insight to their volume analysis. By comparing current trading volumes with historical averages, traders can better identify breakouts , validate price trends, and spot reversals. The ability to apply an average to RVol, as seen on platforms like Zone Web, offers even more precision in spotting meaningful volume activity and reducing false signals.