Dow Volume Bigotry

/_SECTION_BEGIN("DOW VOLUME BIGOTRY");
// DOW VOLUME BIGOTRY
// Gerard Carey  - Sat 12 April 2008
/* The problem I have with Volume is that my TA has consistently 
failed to come up with a useful volume indicator. One that would 
consistently confirm entry signals from other sources. 

I think most of us would agree that, in the short term, prices can 
change without significant increases in volume. You would think 
that logic, let alone common sense, would therefore suggest, even 
to someone as slow as I, that trying to create a useful short term 
volume indicator is impossible, a downright stupid thing to even 
attempt, and a complete waste of time. 
Me - an impossibly stupid timewaster? 
Some things are hard to deny.

So I started out afresh to solve this Volume indicator dilemma by 
trolling thru various books and Net sources looking to gather and 
then to distill the collective wisdom on volume. 
The collective wisdom that I found had already been distilled,
by Charles Dow.

I found the following somewhere.

"When price movements are accompanied by high volume, Dow believed 
this represented the "true" market view. If many participants are 
active in a particular security, and the price moves significantly 
in one direction, Dow maintained that this was the direction in 
which the market anticipated continued movement. To him, it was a 
signal that a trend is developing"

Obviously what I should be doing is trying to do is to identify 
this trend creating/sustaining volume. I'm sure others have 
done it, but I wanted to do it myself, so I'd understand it clearly. 
I'd looked at Chaikin and Twigg and all the other volume indicators 
but I didn't understand, couldn't get their gist, couldn't find 
their intrinsic value. 

Now Mr Dow had given me the basic premise I'd been looking for. 
I needed to identify the volume that creates and sustains the 
predominant price trend.

Being a bit of a numbskull when it comes to AFL, I approach any 
new indicator as follows. 
I have a section of a price chart that I know particularly well. 
It displays a strong stable uptrend where I once had a series of 
good pullback trades, one after another, bang bang bang. 
Trades which, with the benefit of hindsight and experience, I now 
consider almost "sure thing" trades.
Ater coding or copying a new indicator I plot it in a pane under 
this price chart. Then I check to see what this new indicator is 
doing at the time of these "sure thing" pullback trades. If it 
doesn't agree or provide new insights, I dump it and move on.

I'll use my "sure things" process to test this new volume indicator.
It's a simple approach that works for me. 
I can't/don't grasp new concepts readily. 
I need to be beat over the head with them, several times, on succesive days. 

I wanted an oscillator based on a Dow's simple premise. One that 
didn't mess me about, that I didn't have to spend a lot of time 
analysing, and that told me one way or the other, how bullish or 
how bearish.
I wanted an oscillator that made up its damn mind and showed me. 
I wanted a Volume Bigot.  

Ok, I started start coding the contention, that progressively higher 
closing prices and the amount of volume that accompanies them signify 
bullish market sentiment, and vice versa.

So the Dow Volume Bigot would separate Volume into BULLISH, 
IIf(Close>=Ref(Close,-1),Volume,0);    // an oft used calculation 

and BEARISH elements.
IIf(Close<=Ref(Close,-1),Volume,0);    

Where Close is the same as yesterdays Close, the volume is by definition 
neither bullish nor bearish, but it's still volume and I'm damned if 
I'm going to exclude it, and I can't satisfactorily explain why, except 
to say that it all belongs, so it must all belong.
So, as you can see by the "=" being inserted above, I included it in 
both calculations.
*/

// I next set up the Period Parameter (more about the selected setting later)
periods = Param("Periods", 34, 1, 200, 1 ) ; 

/* and utilised Sum() to total the bull and bear Volume over the number 
of days/bars that I specified. */

BulldayVol= ( Sum( IIf( C>=Ref(C,-1), V, 0), periods)) / periods ;
BeardayVol= ( Sum( IIf( Ref(C,-1)>=C, V, 0), periods)) / periods ;

/* I then manipulated the formula to get an oscillator. Don't get hung up 
trying to understand this. It's just a method of combining and displaying 
bullish & bearsish Volume data as an oscillator. Not that Important! */

TheDowVolumeBigot= 100-(100/(1+(BulldayVol/BearDayVol)))-50;

/* IMO the MOST important level on any indicator is the neutral level, 
where bullishness equates to bearishness. I like it to be in the middle 
of the pane. It's just easy on the eyes. In the DVB it is at Zero.*/

Plot(TheDowVolumeBigot,"       THE DOW VOLUME BIGOT   ",1,4+styleNoLabel);
/* I plot the DVB line in bold black so it is prominent. I do this to 
ensure I don't view the indicator as just as a "bull/bear area" oscillator. 
The Black Bigot line has inherent qualities of its own. I now get some value 
by occaisionally plotting trendlines on it and looking for trend line breaks, 
as well as divergence. */

/* I plot the DVB again as a histogram with green for >0 (bullish) and 
red for <0 (bearish) */  
Colour= IIf(TheDowVolumeBigot>0,8,4);
Plot( TheDowVolumeBigot,"",Colour,2);

Plot(0,"",colorGrey50,styleNoLabel); // The important Neutral level

// The method of displaying the DVB gives precise action levels. 
Plot(10,"",colorGrey50); Plot(-10,"",colorGrey50);
Plot(20,"",colorGrey50); Plot(-20,"",colorGrey50);

/* Now back to figuring the correct periods parameter that will specify 
the predominant trend. OK, so now I've got the DVB on a pane and I'm trial 
dialing the period parameter. 
After checking out many different periods I got to trying 34 as I reckon 
that price being above its MA(C,34) is a reasonable indication of the 
predominant trend being positive, and lotsa folks seem to use 34 for various 
reasons. Worth a try. 
Then before I'd even got to check out the "sure thing" trades something 
hit me right between the eyes. Wallop. Diverence.

 

I've got a volume indicator showing divergence. Bearish volume (ie below zero) 
steadily getting less bearish before price finally bottoms then turns up. 

I slapped the Dow Waves indicator underneath. It's a cracker at finding divergence. Sure enough, there it was again, identified even earlier.  
Blimey Charlie, I think we're on the right track. 

Lets zoom out now and have a look at a trend.

 

The downtrend, at the end of which the divergence was noted, was preceeded by a 
classic uptrend - its start denoted by price breaking to new highs in Sept.
The ensuing price rise was accompanied by significant increases in volume - displayed clearly by the DVB, and not so clearly, if at all, by the standard volume histogram.

NB. 
This is where I now get my major assistance from the Dow Volume Bigot.
I get assistance with position size.
Now you could just use the DVB as part of your entry selection proceedure 
and leave it at that. But we know, or should do, how important it is that 
we need to win more on our winners than we lose on our loosers.

With the benefit of hindsight I'm looking at the chart above and saying to myself,
"Look At That Volume! If I had my time again wouldn't I just be loading 
up for BIG GAME for those four "sure thing" pullback trades noted with 
green arrows on Dow Waves pane. Then it's back to regular position size 
for the three grey arrow trades when bullish volume has faded but a trade 
is still indicated".

Instead of having had six good trades and one small loser, I would have had 
four great trades, two good trades, and one small loser.

The Maturing Trend
Ok let's look at Trend Maturation with the Dow Volume Bigot.
The DVB shows enthusiatic buyers in action in the first third of the trend. 
Big institutions and traders saw price breaking to new highs and got established early on in the trend - the trend they were helping to create. 
Remember our basic contention that trends can't be created or survive 
without a supply of enthusiastic buyers? We can see them arriving! 
Pullback traders like me and late arrivals helped maintain the trend 
but didn't provide enough volume to maintain it for much longer. 
Two thirds of the way thru the trend we can see it's strength fading. 
Our trend is maturing.
Divergence again? Look at those DVB peaks and compare them 
to the peaks on the price chart.

Note also how the DVB breaks down thru zero into Bear territory in concert 
with the red predominant Medium-Term trend on the Dow Waves indicator.
Obviously the word to abandon ship has gone out and everyone is jumping.
Contrast this with the lag in the DVB crossing back up thru zero as 
compared to the red Medium-Term Dow Wave. Although the DVB divergence gives 
us an early indication of trend change our sailors are generally much 
slower in gaining the confidence to climb back on board.

I'll get around to checking out whether this "out in a hurry - back in more slowly" is a regular occurrence as the findings may give some insight into 
the "Volume leads Price / Price leads Volume" debate.

The Quick and Easy Interpretation
Remember how I said I wanted an indicator that I didn't have to spend a lot 
of time analysing. Looking at proposed entry spots on many charts has brought 
me to a pretty basic conclusion.
When the DVB is over 10 it means the situation is solidly bullish. 
And obviously if it is over 20 it's extreemly bullish.
Vice versa for the bearish situation.
That's the quick and easy interpretation.
You may also obtain further info by using trendlines, and looking for divergence and patterns.

Evaluation Suggestions
Plot the DVB in a pane under some of your prior trades. Then ask yourself if 
the info provided would have affected your decision making. Both as to the entry itself and as regards position size.

Plot it under the Index you consider most represents your market.
Do you gain any new insights into the overall Bullish/Bearish nature of the market?

Finally, let's remember and re-evaluate from our charts, Dow's assertion.

If many participants are active in a particular security, and the price 
moves significantly in one direction, this is the direction in which 
the market anticipates continued movement.

Notes
All I've really done is to total up the bull & bear volume for 34 days/bars 
and display it as an oscillator. 
Simple really. Easy to understand. No confusing mathematical hijinks.

I feel I should apologise for the staggered way in which the formula is presented but I needed you to think your way thru it so you'd understand it thoroughly, because when it comes to indicators, Understanding and Interpretation is everything.
Probably should apologise for repeating myself a few times also.
And for blathering on somewhat.
You should be able to copy/paste the complete contents of this document 
into the AmiBroker Formula Editor so the indicator can be displayed and 
the interpretation saved with it. The charts will disappear. And you can 
delete any of my blather you don't want.
I'll include the document in the Files section also.

I hope all this guff-n-waffle is of some value to you in your trading 
if only in leading to a better understanding of Volume.

Best of luck, Regards, and Good Trading
Gerard
*/
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