Volume Reversal Indicator

The Volume Reversal Indicator tool identifies potential market turning points by analyzing the relationship between price volatility and relative volume exhaustion.

Usage

The Volume Reversal Indicator is designed to highlight mean-reversion opportunities when price movement becomes overextended while trading volume shows specific exhaustion characteristics.

• Bullish Reversal: A long entry signal is considered when the Price Change Ratio crosses below the Lower Band (-2 by default) and the Volume Ratio is above the specified Level (0.75 by default). This indicates a significant price drop accompanied by a specific volume signature compared to historical averages.
• Bearish Reversal: A short entry signal is considered when the Price Change Ratio crosses above the Upper Band (+2 by default) and the Volume Ratio is above the specified Level. This indicates an overextended upward move.

The indicator is plotted in a separate pane where the Price Ratio is shown as columns (red for positive, green for negative) and the Volume Ratio is shown as a solid line.

Details

This script is based on an idea by Michael Cooper and focuses on five specific entry and exit conditions:

1. The absolute value of the 5-day price change must be larger than the standard deviation of price changes (calculated over a longer period).
2. The recent 5-day average volume is compared against the 5-day average volume from ten days prior.
3. Negative price changes suggest long entries when bands are breached.
4. Positive price changes suggest short entries when bands are breached.
5. In the original logic, positions are typically held for a fixed duration of 5 days.

The script normalizes price action by dividing the absolute price change over the "Fast Length" by the standard deviation of daily changes over the "Slow Length." This creates a z-score-like oscillator that identifies statistical outliers in price movement.

Settings

Price Change Settings

• Fast Length: The lookback period used to calculate the current price change (default is 5).
• Slow Length: The lookback period used to calculate the standard deviation of price changes for normalization (default is 100).
• Band: The threshold multiplier for the Price Ratio. Values exceeding this level are considered statistically significant (default is 2).

Volume Settings

• Length: The period used for calculating the short-term average volume (default is 5).
• Ratio: The percentage threshold used to determine if the volume ratio meets the entry criteria (default is 75).
• Period: A multiplier used to determine the historical offset for the secondary volume average (default is 2).

FAQ

How do I use the Volume Reversal Indicator?

You can use it to identify exhaustion points in the market. Look for the Price Ratio columns to exceed the blue horizontal bands while the Volume Ratio line is above the Buy/Sell level.

Can I change the sensitivity of the signals?

Yes, by adjusting the "Band" setting or the "Ratio" setting. A higher Band value will result in fewer, more selective signals, while a lower Band value will provide more frequent alerts.

Where can I access this tool?

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