Volume Rate of Change

Volume Rate of Change (VROC)

Understanding volume analysis is very necessary for successful trading, and one indicator you can use for such analysis is the Volume Rate of Change (VROC). Do you know about this indicator and how to use it?

In trading, the Volume Rate of Change (VROC or Volume ROC), is a momentum indicator that measures the rate at which volume changes over a specified period. It helps traders observe the shift in market sentiment and assess the strength or weakness of price movements based on changes in trading volume.

In this post, we will take a look at everything you need to know about this indicator: what it is, how it works, and how you can improve your trading strategies with it. Let’s dive in!

Key takeaways

  • Volume Rate of Change (VROC or Volume ROC) measures the rate at which volume changes over a specified period.
  • VROC helps traders analyze volume trends.
  • We provide you with a backtested trading strategy.

What is the Volume Rate of Change (VROC) in trading?

In trading, the Volume Rate of Change (VROC or Volume ROC), is a momentum indicator that measures the rate at which volume changes over a specified period. It helps traders observe the shift in market sentiment and assess the strength or weakness of price movements based on changes in trading volume.

The VROC is considered a momentum oscillator, as it oscillates around a zero line — when the values are positive, it indicates an increase in volume compared to the previous period, and when the values are negative, it indicates a decrease in volume. It is similar to the price rate of change (price ROC), but it’s based on volume rather than price. The indicator shows whether there is a volume trend in either the upward or downward direction, which can be used to analyze the price action.

How does VROC help traders analyze volume trends?

The VROC helps traders analyze volume trends by tracking the rate at which trading volume changes over a specified period. If the change is positive, it means the instrument is experiencing an increasing trading volume over the period. This can support the trader’s price action analysis.

In the case of rising prices, it means the price is rising on an increasing volume, which may indicate a healthy uptrend. If the price is falling, it means the decline is happening on increasing volume and could imply a serious downtrend. If the price is moving sideways, the consolidation is happening on increasing volume, which means it could be accumulation or distribution and the price would break out soon.

Conversely, if the volume trend is negative, it means there is decreasing volume over the period and whatever price action happened over that period happened on a decreasing volume. This could give traders a clue about the market and how to trade.

Volume Rate of Change (VROC) trading strategy – rules, backtest, returns

Now that we have explained the indicator, can we make a trading strategy complete with trading rules?

We tried, but finding anything profitable or worthwhile mentioning seems hard. So, for this article, we skip a backtest.

Why is VROC important in financial markets?

The VROC is important in financial markets because it helps in analyzing the strength of a price trend. Both traders and investors use it to assess the strength or weakness of price movements based on changes in trading volume, which can give a clue about market sentiment. When the VROC is rising, it means there is momentum in whatever direction the price is going — in an uptrend, it means increasing buying pressure; in a downtrend, it means increasing selling pressure; and in a sideways market, it could mean accumulation or distribution.

Put simply, the VROC is important because it helps traders and investors track volume trends and determine if an asset is experiencing a rising or declining volume trend. It can be used with the price ROC, which measures the rate of change of an instrument’s closing price, to make more informed trading decisions.

When should traders use VROC as an indicator?

Traders should use the VROC indicator when they want to analyze the effects of volume on price movements. The indicator helps them track volume changes so as to know the momentum of price movements. When traders should use the VROC as an indicator depends on the trader’s style of trading. Swing traders who make use of the daily timeframe for their analysis would prefer to use the indicator after the day’s market close to ensure they are using the day’s total trading volume.

Where can traders find VROC data?

Traders can find the VROC data on any trading platform that provides market data. Even if the platform doesn’t have a built-in VROC indicator, it’s easy to get a custom-made indicator for the platform. However, most charting and trading platforms come with a built-in indicator, so they simply need to add it to their charts to perform their analysis.

Since the VROC is a volume-based indicator, its data can only make sense if it is for an asset that is trading on a central exchange where the actual trading volume is recorded. So, it can only be used for assets like stocks, bonds, and commodity futures. The indicator wouldn’t make sense for trading the spot forex market as the market does not trade on a centralized exchange and, thus, has no actual total trading volume.

Which trading strategies utilize the Volume Rate of Change?

The trading strategies that utilize the Volume Rate of Change are momentum-based strategies like the breakout strategy and pullback reversal traders in a trending market. In the case of a breakout trade, a rising VROC can tell you that the breakout is happening on an increasing volume trend, which is a good sign that the breakout is valid.

For pullback reversal (trend continuation) trades, the VROC can show when the pullback is running out of steam — a declining volume. A rising VROC on price reversal to start the next impulse wave is a sign that there is momentum in trading in the direction of the trend.

Can VROC predict market trends accurately?

Yes and no. Sometimes, the VROC can predict market trends accurately, but at other times, it can go off the mark by a lot. So, it cannot predict market trends accurately all the time — as a matter of fact, no indicator does! This is why you should not rely on one indicator alone when creating a trading strategy; it’s better to use 2 or 3 complementary indicators or a few indicators plus price action analysis.

How is VROC calculated in trading analysis?

To calculate the VROC in trading analysis, this is the formula to use:

VROC = [(Vt – Vn) / Vn] * 100

Where:

Vt = Current trading volume

Vn = trading volume at n periods ago

Here are the steps to follow when calculating the VROC:

  1. Select the period you want to use for your analysis — 7, 14, or 21 period.
  2. Find the current trading volume and the trading volume of the chosen period ago
  3. Calculate the difference between the current volume and that of the selected period.
  4. Divide the difference by the volume of the chosen period ago.
  5. Then, multiply the result by 100 to present the VROC as a percentage.

What factors influence VROC readings?

Many different factors can affect VROC readings. One of them is the trading volume. If the trading volume is increasing, the VROC readings will show higher values, and if the volume is decreasing, the readings will show declining values.

Another factor that may influence VROC readings is the period selected. The longer the period, the more likely there would be a volume change as the market conditions become unrelated. The timeframe also matters. Higher timeframes’ VROC readings may be more reliable than lower timeframes’ VROC readings.

Why do traders monitor changes in volume?

Traders monitor changes in volume because it shows the momentum behind the price movements. When the VROC is rising, it means there is momentum in whatever direction the price is going, while a declining VROC indicates poor momentum in the price action. For example, in an uptrend, a rising VROC means increasing buying pressure.

Similarly, in a downtrend, a rising VROC means increasing selling pressure. In a sideways market, a rising VROC could mean accumulation or distribution. Thus, it helps traders track volume trends to make more informed trading decisions.

Is VROC suitable for both short-term and long-term trading?

Yes, the VROC may be suitable for both short-term and long-term trading, but it is more suitable for short-term trading. The reason is that when you use a long-period VROC, there is a long time between the current time and the n periods ago, so the market conditions and factors influencing the market during those periods differ a lot such that the change in trading volumes could not imply a changing momentum.

What are the limitations of using VROC?

The limitations of using the VROC include:

  • It does not make sense in markets where actual volumes aren’t recorded: You cannot use the VROC in markets such as the spot forex market where there’s no actual volume that reflects the total market volume.
  • It can’t be used as a stand-alone indicator: You cannot use the VROC alone. It must be used with other indicators or price action analysis to get a sense of the market momentum.
  • It does not tell you when to enter or exit a trade: The indicator cannot tell when to enter or exit a trade. You must combine it with other analysis tools to formulate a clear trading strategy.

How does VROC differ from other volume indicators?

The VROC differs from other volume indicators in that it measures the rate of change of volume between the present moment and some time in the past. Another difference is that while other volume indicators like the MFI, NVI, and PVI use both the volume and price data to compute their values, the VROC is calculated solely from volume data. In essence, the VROC is a volume-only indicator — it simply finds the rate of volume change.

What role does VROC play in technical analysis?

The VROC plays an essential role in technical analysis. Volume is one of the key market variables, and its relationship to the price is important in analyzing market activities each day. The VROC is simply an easy way to track the changes in volume so you can use it to analyze the price action.

With the VROC, you can find the momentum of volume change and when you combine it with the price action, you can ascertain the force behind the price movements. It can tell you if a rising price action is coming with a huge buying pressure and the same for a price decline (selling pressure).

Are there variations of VROC used in different trading platforms?

Yes, there may be variations of VROC used in different trading platforms, as different traders and developers create the ones that suit their trading needs. In fact, you can have different versions of the indicator on the same trading platform. On TradingView, for example, apart from the normal VROC, there is one called Close VROC.

How do traders interpret sudden spikes in VROC?

Traders interpret sudden spikes in the VROC differently, as they don’t just base their interpretation on the VROC alone but take a holistic look at the market to know the implication of the indicator’s reading. A sudden spike in VROC when the price breaks out of a key level or a chart pattern, like the flag or triangle, could mean that the breakout happened on a huge volume, which is a good signal. On the other hand, if the VROC spike happens when the price is diverging from the indicator, it could signal a potential price reversal.

What are the potential risks of relying solely on VROC?

The potential risks of relying soles on the VROC include:

  • The indicator is based on volume alone and cannot always tell you what the price is doing or will do in the future.
  • It uses past volume data in its calculations and, thus, cannot predict how the volume of transactions will turn out in the future, let alone what that would mean for price.
  • It can give frequent false signals and can be manipulated by smart money trying to hide their activity in the market.
  • It can’t identify what the price will do next with any certainty.

Can VROC signal potential market reversals?

Yes, the VROC can signal potential market reversals when there are divergences between the VROC and the price. That is, if the price is making lower lows while the VROC is making higher lows, it could indicate a potential bullish divergence, which suggests that the existing downtrend may reverse.

Similarly, if the price is making higher highs while the VROC is making lower highs, it could signal a potential bearish divergence, which suggests that the existing uptrend may reverse.

How do market conditions affect VROC readings?

How market conditions affect VROC readings depends on how they affect the trading volume since the indicator is volume-only. If the volume changes are negative, the indicator readings will show a declining trend. If the volume changes are positive, the indicator readings will show a rising trend.

However, you can use the VROC readings to analyze what could be going on in the market during different market conditions. For instance, rising VROC readings in an uptrend means there is increasing buying pressure, while in a downtrend, it means increasing selling pressure. In a sideways market, rising VROC readings could mean accumulation or distribution.

What are the benefits of combining VROC with other indicators?

The benefits of combining the VROC with other indicators are many. These are some of them:

  • It helps to understand the volume behind price movements and to assess market momentum.
  • It helps traders interpret the price action in different market conditions, making it easier to know when there is buying pressure, selling pressure, and potential accumulation or distribution.
  • The combination can be used to create a possible trading strategy with clear criteria for entry and exit.

How can traders adjust VROC parameters for different assets?

Traders can adjust their VROC parameters for different assets by first observing those assets to see their usual patterns of trading volume changes. It’s from their observation they would know the parameters to set for their VROC for those assets. Also, when formulating a strategy for any asset, they have to backtest different parameters to know the one that offers the best result. One thing to note though; it makes no sense to use the VROC when trading spot forex since the asset has no reliable trading volume.

What historical trends does VROC reveal?

The historical trends VROC reveals depend on the asset and the period chosen. But generally, the indicator can show you whether the volume is increasing or decreasing over the period under review. For example, a 20-day VROC can reveal if the trading volume today is higher or lower than it was some 20 days ago.

How do traders use VROC to confirm price movements?

To use the VROC to confirm price movements, traders try to analyze what the price is doing in light of the changes in volume as reflected by the VROC. For instance, if the price is rising and breaks out of a chart pattern, say a flag or pennant, they would want to know if the VROC shows a rising volume, which confirms that there is strong buying pressure behind the move.

What are common misconceptions about VROC?

The common misconceptions about the VROC are as follows:

  • The VROC uses price changes in its calculation: It is a volume-only indicator and has no price component. So, it cannot directly tell you about price movements.
  • It tells you how the price would move: The indicator can only tell you about changes in volume over the chosen period. It is up to you to use the information to interpret price action.
  • It can be a strategy on its own: No, it cannot. You must combine it with price action analysis or other indicators to define your entry and exit criteria.

How can beginners effectively incorporate VROC into their trading strategies?

To effectively incorporate the VROC into their trading strategies, beginners have to first learn about the indicator and understand how it works. It’s after they have done so that they can find a way to fit into their trading strategies.

Those who love to focus on price action analysis may use the indicator to identify buying and selling pressures in the market or know when smart money is accumulating or distributing their positions. They can also use its divergences from the price to identify potential market reversals.

For those who prefer to use indicators, they can find a way to make the VROC complement other indicators they are using by providing insight into market momentum based on volume. The most important thing is to have a robust strategy and backtest it before using it in the market.

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