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Volume Spread Analysis (VSA)
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Volume Spread Analysis (VSA)

  #51 (permalink)
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raikark View Post
I though the key thing with FX trading and VSA is that the absolute number or volume was irrelevant it is simply an indicator of activity

That's right. The tick count of the EURUSD pair is similar to the volume of the 6E contract, which confirms that FX tick counts is a fairly good proxy for volume. However, the VSA plugin does not give identical signals on a bar for bar basis with these instruments. They are close, but not the same.

With NinjaTrader and IQ Feed, it is possible to plot the volume of the 6E contract under the EURUSD tick count on one chart, with the bars from the 6E contract hidden. I have a delayed feed for the 6E contract, but this is a good way to compare the data.

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  #52 (permalink)
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VSA, Better Volume and Effort Index

The reason that I am posting here is that somebody asked to have a look at an indicator called effort index. I do not think that we should start a different thread for every indicator. Also the thread "Want your NinjaTrader indicator created for free" has become a huge garbage collector, so it is not worth posting there.

The effort index basically looks at the effort (volume) and the resulting price move (momentum or spread) and tries to depict the relationship. Before commenting on the effort index, I would like to come back to VSA, as little has been said so far.


VSA (Volume Spread Analysis)

The term was coined by Bill Williams. His book "Master the Markets" is available as a free PDF. One of the chapters in his book is called "Effort versus Result". The Effort Index clearly refers to that book.

I think it is a good idea to visualize effort as incoming market orders, while limit orders sitting on the order book come in defense of current prices. I visualize limit orders (and in particular iceberg orders) as soldiers sitting in trenches and which must be overcome to allow price to move beyond support or resistance.

The information that can be used for volume spread analysis is

-> the volume of the bar (best divided into buying volume (market buy vs. limit sell) and selling order (market sell vs. limit buy)
-> the spread (range) of the bar (size of the battlefield)
-> the range of the body of the bar (outcome of the trench war)


Simple Approach

A simple approach only looks at the volume and the range. In that case there are four possible outcomes:

high volume and wide range -> climax bar, climax churn bar
high volume and narrow range -> churn bar
low volume and wide range -> order book is empty (fewer limit orders)
low volume and narrow range -> absence of both buyers and sellers

The simple approach does not differentiate between buying volume (trading at the ask) or selling volume (trading at the bid). Both Better Volume and Effort Index use the simple approach, so I am not going further wth this post.


Better Volume

The Better Volume indicator identifies climax bars, churn bars, climax churn bars and low volume bars. Although it is useful, it has a few weaknesses. One weakness is that it cannot recognize a second climax bar or churn bar after a first slightly stronger one. The second weakness i that it does not allow to differentiate between buying and selling volume.


Effort Index

I had a quick look at the Amibroker code posted here: https://futures.io/thinkorswim-programming/31763-effort-index.html#post410067. Other than the Better Volume indicator which does not plot anything different than volume, the Amibroker indicator normalizes both effort and result. The normalization of effort is achieved in several steps:

(1) a ratio is calculated vai dividing volume by average volume
(2) the highest and lowest values for this ratio over the lookback period are used to define a scale between 0 and 100
(3) the rescaled effort is an oscillator that can take values between 0 and 100

In a similar way the result is normalized, where result can either be the spread or the close to close move:

(1) a ratio is calculated via dividing current range by average range
(2) the highest and lowest values for this ratio over the lookback period are used to define a scale between 0 and 100
(3) the rescaled result is an oscillator that can take values between 0 and 100

The effort index is obtained via dividing rescaled result by rescaled effort.


Comment on Effort Index:

In my opinion the effort index itself is pretty useless, while the rescaled effort and rescaled result can be used as input values for volume spread analysis. Let me give an example:

A wide range high volume bar can have the same effort index as a narrow range low volume bar. The first bar is a climax churn bar or a climax bar, while the second one could be a churn bar or just nothing. Volume spread analysis has two dimensions - two separate source of data, which are price and volume - and it cannot be reduced to a single dimension. If you take off one dimension, you may find yourself in a trap, see picture below:

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


By the way this building would be suitable for the printing press of any Southern European Central Bank. The stairs represent the money supply, one way only.


There are a few other shortcomings with the Amibroker indicator:

-> The average spread is calculated by using Wilder's average, while the average volume is calculated from a SMA. Wilder's average when used with the same lookback period is not comparable to the the SMA, but the lookback period needs to be adapted.
-> The momentum is calculated close-to close. The gap will therefore produce a result without any effort and falsify the outcome displayed via the histogram. In my opinion at least overnight gaps and gaps related to technical breaks need to be eliminated, as they occur while the market is closed. Intraday gaps not related to technical breaks can be used for the calculation. However, for liquid instruments it is easier to calculate the momentum open-to-close for the same bar.
-> The normalization of effort and result can probably achieved in a more elegant way.


Modified Effort and Result Indicator

Nevertheless the basic idea of the indicator is sound. I have therefore placed the result histogramm on top (green representing an up move, red representing a down move) and the normalized effort based on volume below. the values can now be used to identify climax, churn, squat and fake bars.

I have coded a first sample. The averages are different from the Amibroker indicator. Not tempting to reproduce it, but simply compare it to the Better Volume approach. A remaining weakness is that both indicators do not yet cope with the transition from off-session to regular session volume. Better results can probably obtained, when VSA is based on relative volume instead of absolute volume.

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  #53 (permalink)
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Looking inside the bar


From watching range bars on a volume ladder, one notices that from bar to bar, there are big differences in the number and extent of the price excursions within each bar. Sometimes the price will go cleanly from one end of the bar to the other and the bar will complete in a short time. Sometimes there will be many oscillations within the range before the bar completes.

This information is available from OnBarUpdate in real time. For backfill, it can be obtained from the GomRecorder or a one tick secondary series, or by GetBars(). Or we can consider how long it takes for the bar to complete. Or both, and how they relate to each other.

Another clue is the amount of volume that needs to be transacted before the price can move from one level to the next. For a liquid instrument like Treasury bonds or the ES, that might be a one tick transition. For others like the YM which seems to jump between separated prices in the same way that electrons jump between orbits, that might be a transition of several ticks.

So maybe these clues can be factored into an estimate of the effort, although I don't have any specific algorithm in mind. The size of the order book while price moves occur could also be considered.

At present there is no Level 2 historical data, but I had a crude order book recorder, derived from the GomRecorder, working for a while. Maybe that should be taken out of mothballs. However, to keep things in perspective, nobody trades live with historical Level 2 data. Well, at least I hope not.


Quoting 
The Better Volume indicator identifies climax bars, churn bars, climax churn bars and low volume bars. Although it is useful, it has a few weaknesses. One weakness is that it cannot recognize a second climax bar or churn bar after a first slightly stronger one. The second weakness is that it does not allow to differentiate between buying and selling volume.

The recognition problem highlighted above could be fixed by changing the way an exceptional bar is flagged - using comparisons to moving average levels or standard deviation bands, or percentile rank instead of the most extreme value of the last N bars. But that would not change the fact that the underlying logic would still be very simplistic.

Thank you @Fat Tails (and M.C. Escher), for the insights, and humor, of the previous post.

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Last edited by Zondor; January 15th, 2015 at 09:04 PM.
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  #54 (permalink)
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@Fat Tails

Very well said, it is very clear now, I think at least for me would be very useful to see in an indicator the effor and result in one bar, this is what catches my attention at first, now you have stablished a point and is clear now, thank you for that!!

Now visually your indicator looks very promising, if we combine this"effort-result" indicator with buying and selling pressure zones or anti-climax setups this is where this indicator could make the difference, to be able to see under the hood, this is what catch my eyes!!

I think we should be glad to use your indicator when you and if you make it available,

Appreciate your time to explain this.

Thank you!

JD



Fat Tails View Post
The reason that I am posting here is that somebody asked to have a look at an indicator called effort index. I do not think that we should start a different thread for every indicator. Also the thread "Want your NinjaTrader indicator created for free" has become a huge garbage collector, so it is not worth posting there.

The effort index basically looks at the effort (volume) and the resulting price move (momentum or spread) and tries to depict the relationship. Before commenting on the effort index, I would like to come back to VSA, as little has been said so far.


VSA (Volume Spread Analysis)

The term was coined by Bill Williams. His book "Master the Markets" is available as a free PDF. One of the chapters in his book is called "Effort versus Result". The Effort Index clearly refers to that book.

I think it is a good idea to visualize effort as incoming market orders, while limit orders sitting on the order book come in defense of current prices. I visualize limit orders (and in particular iceberg orders) as soldiers sitting in trenches and which must be overcome to allow price to move beyond support or resistance.

The information that can be used for volume spread analysis is

-> the volume of the bar (best divided into buying volume (market buy vs. limit sell) and selling order (market sell vs. limit buy)
-> the spread (range) of the bar (size of the battlefield)
-> the range of the body of the bar (outcome of the trench war)


Simple Approach

A simple approach only looks at the volume and the range. In that case there are four possible outcomes:

high volume and wide range -> climax bar, climax churn bar
high volume and narrow range -> churn bar
low volume and wide range -> order book is empty (fewer limit orders)
low volume and narrow range -> absence of both buyers and sellers

The simple approach does not differentiate between buying volume (trading at the ask) or selling volume (trading at the bid). Both Better Volume and Effort Index use the simple approach, so I am not going further wth this post.


Better Volume

The Better Volume indicator identifies climax bars, churn bars, climax churn bars and low volume bars. Although it is useful, it has a few weaknesses. One weakness is that it cannot recognize a second climax bar or churn bar after a first slightly stronger one. The second weakness i that it does not allow to differentiate between buying and selling volume.


Effort Index

I had a quick look at the Amibroker code posted here: https://futures.io/thinkorswim-programming/31763-effort-index.html#post410067. Other than the Better Volume indicator which does not plot anything different than volume, the Amibroker indicator normalizes both effort and result. The normalization of effort is achieved in several steps:

(1) a ratio is calculated vai dividing volume by average volume
(2) the highest and lowest values for this ratio over the lookback period are used to define a scale between 0 and 100
(3) the rescaled effort is an oscillator that can take values between 0 and 100

In a similar way the result is normalized, where result can either be the spread or the close to close move:

(1) a ratio is calculated via dividing current range by average range
(2) the highest and lowest values for this ratio over the lookback period are used to define a scale between 0 and 100
(3) the rescaled result is an oscillator that can take values between 0 and 100

The effort index is obtained via dividing rescaled result by rescaled effort.


Comment on Effort Index:

In my opinion the effort index itself is pretty useless, while the rescaled effort and rescaled result can be used as input values for volume spread analysis. Let me give an example:

A wide range high volume bar can have the same effort index as a narrow range low volume bar. The first bar is a climax churn bar or a climax bar, while the second one could be a churn bar or just nothing. Volume spread analysis has two dimensions - two separate source of data, which are price and volume - and it cannot be reduced to a single dimension. If you take off one dimension, you may find yourself in a trap, see picture below:

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


By the way this building would be suitable for the printing press of any Southern European Central Bank. The stairs represent the money supply, one way only.


There are a few other shortcomings with the Amibroker indicator:

-> The average spread is calculated by using Wilder's average, while the average volume is calculated from a SMA. Wilder's average when used with the same lookback period is not comparable to the the SMA, but the lookback period needs to be adapted.
-> The momentum is calculated close-to close. The gap will therefore produce a result without any effort and falsify the outcome displayed via the histogram. In my opinion at least overnight gaps and gaps related to technical breaks need to be eliminated, as they occur while the market is closed. Intraday gaps not related to technical breaks can be used for the calculation. However, for liquid instruments it is easier to calculate the momentum open-to-close for the same bar.
-> The normalization of effort and result can probably achieved in a more elegant way.


Modified Effort and Result Indicator

Nevertheless the basic idea of the indicator is sound. I have therefore placed the result histogramm on top (green representing an up move, red representing a down move) and the normalized effort based on volume below. the values can now be used to identify climax, churn, squat and fake bars.

I have coded a first sample. The averages are different from the Amibroker indicator. Not tempting to reproduce it, but simply compare it to the Better Volume approach. A remaining weakness is that both indicators do not yet cope with the transition from off-session to regular session volume. Better results can probably obtained, when VSA is based on relative volume instead of absolute volume.

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


J Dennis Neeman.
Learning..always learning...
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  #55 (permalink)
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Fat Tails,
Your indicator looks promising. It will show who is in control, the Sellers or the Buyers. There is only one question: Is the data that you are using( IB) reliable enough?
I refer to https://futures.io/brokers-data-feeds/22585-unfiltered-data.html

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  #56 (permalink)
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Jaap8242 View Post
Fat Tails,
Your indicator looks promising. It will show who is in control, the Sellers or the Buyers. There is only one question: Is the data that you are using( IB) reliable enough?
I refer to https://futures.io/brokers-data-feeds/22585-unfiltered-data.html

The volume data from Interactive Brokers cannot be recommended, particularly not if you use it with smaller timeframes. Historical backfill is correct, but real-time data is nuts.

My answer is therefore no. If you wish to use volume information to trade, you better pay for a decent data feed.

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  #57 (permalink)
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Hello Fat Tails,
Your effort index is useful for those following Wychoff methods too. i wonder you have this indicator created for Ninja Trader?

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  #58 (permalink)
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Thanks traderlars

Thanks traderlars. Very helpfull your posts about VSA

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