High Volume Spike Reversal Indicator

[davem1979 11]

Dear Trader's lab folks,

 

After reading many of the great threads here such as the ones on Volume Spread Analysis, Market Profile, and Jerry's threads on Market Statistics, I started thinking more about volume's impact on price, and I began noticing that when significant volume enters the market, many times this occurs at or near market turning points.

 

In order to more easily see volume's impact on price, I set out to start developing an indicator that would show greater volume than previous bars and confirmation of a pause and potential reversal by using a price pattern that would show potential weakness when the Volume Spike is at highs and strength when the Volume Spike is at lows.

 

I'm not trying to design this indicator to be traded solely on it's own without regard to trend, S/R, High and Low Volume areas, but it does many times pinpoint the start of the reversal. As well, I believe that by adding a few other conditions to this indicator that would take into account other volume indications based on Bid/Ask volume, such as the Delta (Buy Volume - Sell Volume) it would be possible to get some very nice trade setups that would work in conjunction with our own understanding of volume's affect on price.

 

The Parts of the Indicator:

 

Firstly, I am trying to determine what should signify high volume. I believe that volume is relative, and therefore some days 10,000 contracts in 5 minutes is a lot, and other days 20,000 contracts in 5 minutes is a lot. So, as of now I came up with the condition that if Volume is greater than the previous 6 bars, this should signify great volume. You can use whatever number you like, if you look back 10 bars, you'll get fewer signals, and if you look back only 2 bars, you'll get many more signals.

 

1. My first question to you is: How would you determine that a High Volume Spike is with "High Volume"? Do you have a method that would improve my very basic definition of High Volume that would weed out the high volume bars more reliably?

 

Secondly, I am trying to show a price pattern that shows rejection of the prices in the direction of the High Volume Spike. For Instance:

 

For a "buy signal", I'm looking for price on the bar after the High Volume Spike to close at or above the close of the High Volume Spike bar. As well, I am looking for a close on the bar after the High Volume Spike that is higher or equal to the open, and for the bar to close off of the lows. I basically ensure closing off the lows by this function (Close-Open)<(High-Low).

 

Here's the indicator as I have it now. I programmed it for Pro Real Time Charts, but am currently using a Ninja Trader Demo and have no idea how to program in Ninja Trader. Soon I will be using Investor RT or Market Delta which will make it easier for me to program. If any of you are interested in helping out programming for any charting package, it would be great, as well I am sure the Ninja Trader community would really benefit as well...

 

Here's what I have so far:

 

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HIGH VOLUME SPIKE LONG SIGNAL

 

VolSpike=Low<=Low[1] AND Low<=Low[2] AND Close>=Close[1] AND Close>=Open AND (Close-Open)<(High-Low) AND Volume[1]>Volume[2] AND Volume[1]>Volume[3] AND Volume[1]>Volume[4] AND Volume[1]>Volume[5] AND Volume[1]>Volume[6]

 

VolSpike2=Low>=Low[1] AND Low<=Low[2] AND Close>=Close[1] AND Close>=Open AND (Close-Open)<(High-Low) AND Volume[1]>Volume[2] AND Volume[1]>Volume[3] AND Volume[1]>Volume[4] AND Volume[1]>Volume[5] AND Volume[1]>Volume[6]

 

IF VolSpike OR VolSpike2 THEN

structure=1

 

ELSE

structure=0

ENDIF

 

RETURN structure AS "VolSpike"

HIGH VOLUME SPIKE SHORT SIGNAL

 

VolSpike=High>=High[1] AND High>=High[2] AND Close<=Close[1] AND Close<=Open AND (Open-Close)<(High-Low) AND Volume[1]>Volume[2] AND Volume[1]>Volume[3] AND Volume[1]>Volume[4] AND Volume[1]>Volume[5] AND Volume[1]>Volume[6]

 

VolSpike2=High<=High[1] AND High>=High[2] AND Close<=Close[1] AND Close<=Open AND (Open-Close)<(High-Low) AND Volume[1]>Volume[2] AND Volume[1]>Volume[3] AND Volume[1]>Volume[4] AND Volume[1]>Volume[5] AND Volume[1]>Volume[6]

 

IF VolSpike OR VolSpike2 THEN

structure=1

 

ELSE

structure=0

ENDIF

 

RETURN structure AS "VolSpike"

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Lastly, I believe this indicator can be improved by including conditions that would show either Delta Divergence, or Delta shift from negative to positive for instance, for Long Trades. If we are looking for Long Signals, Delta Divergence could be added by requiring the Delta to be increasing positively into the signal bar, or a Delta shift would be for the Delta to go from negative to positive in the signal bar.

 

If any of you are interested in improving this indicator for any charting package, and sharing, I would greatly appreciate it....

 

Regards,

David

[AndrewJackson 10]

Thread is here http://www.traderslaboratory.com/forums/coding-forum/4515-high-volume-spike-reversal-indicator-development.html