Volume Flow Indicator

The Volume Flow Indicator tool provides a modified approach to trend and momentum analysis by measuring buying and selling pressure through price action and volume. Based on the work of Markos Katsanos, it improves upon the On Balance Volume (OBV) by utilizing a volatility threshold and median price data to provide clearer bullish and bearish signals.

Usage

The Volume Flow Indicator (VFI) is used to identify market direction, potential reversals, and momentum shifts. Unlike standard volume oscillators, the VFI provides an absolute zero line to distinguish between market states.

• Zero Line Crosses: A move above the zero line is interpreted as a bullish signal, suggesting that buying pressure is dominant. Conversely, a move below the zero line indicates a bearish state and serves as a potential sell signal.
• Signal Line Crossovers: The script includes an Exponential Moving Average (EMA) that acts as a signal line. When the VFI crosses above the signal line, it suggests strengthening upward momentum; a cross below indicates weakening momentum.
• Divergences: One of the most powerful applications of the VFI is identifying divergences. If price makes a new high but the VFI fails to do so, it indicates exhausting volume and a possible trend reversal.
• Histogram Analysis: Users can enable a histogram that represents the difference between the VFI and its signal line, providing a visual representation of momentum acceleration or deceleration.

Details

The VFI calculation incorporates several specific modifications to improve accuracy over traditional volume indicators:

1. Median Price: Instead of relying solely on the closing price, the calculation uses the typical price (HLC3), providing a more balanced view of the day's trading range.
2. Volatility Threshold: A cutoff is established based on a 30-day standard deviation of price changes. If price movements do not exceed this threshold, the volume is not added to the total, filtering out market noise.
3. Volume Cutoff: To prevent extreme spikes in volume from distorting the indicator, a maximum volume threshold is applied. Any volume exceeding this limit is capped at the maximum allowed value.
4. Coefficient Scaling: The "Coefficient" setting adjusts the sensitivity of the volatility threshold. Markos Katsanos suggests a value of 0.2 for daily charts and 0.1 for intraday timeframes.

Settings

• VFI length: The lookback period used for the main VFI calculation (Default: 130).
• Coefficient: Adjusts the volatility threshold. Lower values increase sensitivity (Default: 0.2).
• Max. vol. cutoff: Determines the multiplier for capping excessive volume spikes (Default: 2.5).
• Signal Length: The period for the EMA signal line (Default: 5).
• Smooth VFI: When enabled, applies a Simple Moving Average to the VFI line to reduce volatility.
• Show Histogram: Toggles the visibility of the momentum histogram.

FAQ

What does a positive VFI reading indicate?

A positive VFI reading indicates that the accumulation of volume associated with upward price movement is dominant, signifying a bullish trend.

How should I adjust the Coefficient for different timeframes?

For daily trading, a coefficient of 0.2 is typically used. For intraday or shorter timeframes, reducing the coefficient to 0.1 can help account for different volatility levels.

How can I access the Volume Flow Indicator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.