Introduction
Volume-by-Price is an indicator that shows the amount of volume for a particular price range, which is based on closing prices. Volume-by-Price bars are horizontal and shown on the left side of the chart to correspond with these price ranges.
Calculation
- Find the high-low range for closing prices for the entire period.
- Divide this range by 12 to create 12 equal price zones.
- Total the amount of volume traded within each price zone.
- Divide the volume into positive volume and negative volume (optional).
Note that negative volume for a price zone is the sum of volume for all down days in that zone, while positive volume is the total of volume for all up days in that price zone.
Interpretation
Volume-by-Price can be used to identify current support and resistance levels as well as estimate future support and resistance levels. Price zones with heavy volume reflect elevated interest levels that can influence future supply or demand (a.k.a. resistance or support). Long Volume-by-Price bars underneath prices should be watched as potential support during a pullback. Similarly, long Volume-by-Price bars above prices should be watched as potential resistance on a bounce.
Price breaks above or below long Volume-by-Price bars can also be used as signals. A break above a long bar shows strength because demand was strong enough to overcome a supply overhang. Similarly, a break below a long bar shows weakness because supply was ample enough to overwhelm demand.
Conclusion
Volume-by-Price is best suited for identifying present or future support and resistance. The indicator marks potential support when prices are above a long bar and potential resistance when prices are below a long bar. Chartists can enhance their analysis by looking at the positive (green) and negative (red) volume within the Volume-by-Price bars. Long green portions reflect more demand that can further validate support. Long red portions reflect more supply that can further validate resistance. It is important to confirm Volume-by-Price findings with other indicators and analysis techniques. Momentum oscillators and chart patterns are good complements to this volume based indicator.