Technical analysis part 2: VPVR, Moving Averages, Volume, Divergence
Welcome the whole Mr.Advice community to another newsletter.
Today is the second part of the description of the most popular indicators used in trading.
In today’s issue we will discuss:
– VPVR – Volume Profile Visible Range
– Moving Averages
VPVR – Volume Profile Visible Range:
- Indicates traders activity over a selected time period and for specific price levels.
- It draws a histogram on the chart which indicates significant price levels based on volume.
- It is a useful tool for determining support and resistance levels.
- The price level at the bottom of the profile favours the buy side in terms of volume and is a good indicator of support levels.
- The price level at the top of the profile favours the sell side in terms of volume, it is a good indicator of resistance levels.
- It is designed to clearly present to the user the total trading volume of the selected time and specified price range with a breakdown of the volume of buy and sell transactions.
- Important indicator levels:
(a) Point of Control (POC) – The price level for the period with the highest trading volume.
b) Profile High – the highest price level reached in a given period.
c) Profile Low – the lowest price level in the period.
d) Value Area (VA) – the range of price levels in which a certain percentage of the total volume was traded in a given period. Usually this percentage is set to 70%, but it depends on the trader’s decision.
e) Value Area High (VAH) – The highest price level in the value area.
f) Value Area Minimum (Value Area Low (VAL)) – the lowest price level in the value area.
g) High Volume Node (HVN) is the peak volume at or near the price level. HVN is seen as an indicator of a consolidation period. There is then high buy and sell side activity and the market remains at this price level for a long time compared to other profile levels. This can indicate the ‘fair value area’ of an asset. When the price approaches the previous HVN level (or fair value area), a sustained period of sideways movement is expected and it is unlikely that the market will immediately break through this price.
(h) Low Volume Node (LVN) is the opposite of HVN. It is a volume bottom at or near the price level. Low volume nodes are the result of a sharp increase or decrease in price, when there is usually an initial increase in volume followed by a significant decrease. Such a drop in volume may indicate an “area of mis-value” for the asset. When the price approaches the previous LVN level, the market is inclined to quickly break through this price range or rebound. Because it is perceived as an area of inappropriate value, the market will not spend as much time there as at other levels in the profile.
- A moving average is an indicator that follows a trend based on past prices
- It is calculated by taking a period of time and dividing it by the number of periods
- They are used to identify market direction, but also to find where to take a position.
- The most common types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
- The SMA (Simple Moving Average) is the most popular type of average and is formed by calculating the average price of a financial instrument over a selected period.
- An EMA (exponential moving average) is calculated based more on weighting and gives more weight to recent prices and less weight to older prices over a selected period.
- When a lower order average (e.g. EMA10) pierces the higher order average from below and sits on top of it, it can cause the price to rise.
- When the lower-order average (e.g. EMA10) pierces the higher-order average from above and sits below it, this can cause the price to fall.
- Golden Cross – moving average EMA 50 crosses EMA200 from below, thus forming a golden cross and is located on EMA200. This is a pattern for the growth of a given instrument. This tool is effective on higher intervals.
- Death Cross – moving average EMA 50 crosses above EMA200 creating in this way a death cross and is located underneath EMA200. This is a pattern for a decline in the instrument. This tool is effective on higher intervals.
- Identifies the number of financial instruments that have changed hands, counted within a given market over a given time period.
- Volume data is collected and published by the exchanges.
- It is presented on the chart in the form of coloured bars (a green bar indicates an increase in volume and a red bar a decrease in volume).
- This is one of the few indicators that does not include price in its calculation.
- A high volume indicates high interest in a given instrument on the part of market participants and a low volume indicates low interest on the part of market participants.
- A sudden increase in trading volume indicates an increased likelihood of price movement. An increase in volume often suggests that “strong hands” have just taken a position in the market and that the price of the instrument has the right to start rising from now on.
- Strong trend movements are accompanied by increases in trading volume, which is why it is worth considering volume as a measure of trend strength.
- When the price of an instrument reaches the support level, we usually deal with a high volume of purchase transactions, and when the price reaches the resistance level, we observe a high volume of sale transactions.
- A situation where different technical indicators do not confirm each other and we see an anomaly on the chart.
- Detecting divergence is very helpful in market analysis and can be one of the best early warnings of a market reversal.
- Basic types of divergence:
(a) “Bullish” divergence (bullish) divergence – occurs when prices fall to a new low and at the same time the oscillator fails to reach a new bottom. Then the bears lose strength and the bulls are ready to take control of the market.
b) Bearish divergence (bearish) divergence – occurs in uptrends. Prices rally to a new high and the oscillator peaks at a lower level than during the earlier rise. The bulls have no strength and the bears are taking control of the market.
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