Volume Systems User Guide.Book

Volume Systems 2.0 User Guide

July 2010 Edition PF-29-01-02 Support

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Copyright Under the copyright laws, this publication may not be reproduced or transmitted in any form, electronic or mechanical, including photocopying, recording, storing in an information retrieval system, or translating, in whole or in part, without the prior written consent of Nirvana Systems, Inc. Trademarks OmniTrader™, VisualTrader™, Adaptive Reasoning Model™, ARM™, ARM Knowledge Base™, Easy Data™, The Trading Game™, Focus List™, The Power to Trade with Confidence™, The Path to Trading Success™, The Trader’s Advantage™, Pattern Tutor ™, and Chart Pattern Recognition Module™ are trademarks of Nirvana Systems, Inc.

Product and company names mentioned herein are trademarks or trade names of their respective companies. DISCLAIMER REGARDING USE OF NIRVANA SYSTEMS PRODUCTS Trading stocks, mutual funds, futures, and options involves high risk including possible loss of principal and other losses. Neither the software nor any demonstration of its operation should be construed as a recommendation or an offer to buy or sell securities or security derivative products of any kind.

Neither Nirvana’s OmniTrader™, VisualTrader™, Nirvana Systems, Inc., nor its employees and affiliates recommends any specific security for purchase or sale, nor do they recommend any specific approach to investing in securities. Nirvana Systems, Inc. is not an investment advisory service nor a registered investment advisor or broker/dealer.

No representation is being made that the methods presented will guarantee profits in trading. Past performance, whether actual or indicated by historical systems testing, is no guarantee of future performance or success. Information presented by Nirvana Systems, Inc. is from sources Nirvana believes are reliable. However, Nirvana has not independently verified such information. Contents

Chapter 1 Getting Started Introduction...... 1-1 Installing Volume Systems ...... 1-2 Registering the Software...... 1-2

Chapter 2 Volume Indicators and Systems Volume Indicators...... 2-3 Volume Flow Oscillator ...... 2-3 Parameters...... 2-3 Volume Heat Indicator ...... 2-3 Parameters...... 2-4 Volume Weighted Moving Average ...... 2-4 Parameters...... 2-4 Volume Weighted Moving Average Crossover Divergence...... 2-4 Volume Systems ...... 2-5 Dual Volume Flow System ...... 2-5 Parameters...... 2-5 Volume Flow Divergence System...... 2-6 Parameters...... 2-6 Volume Weighted MACD Crossover (VWMACD-C) ...... 2-7 Parameters...... 2-7 Volume Weighted MAC Divergence (VWMACD-D)...... 2-8 Parameters...... 2-8 ACD-C Accumulation/Distribution - Crossover...... 2-9 Parameters...... 2-9 ACD-D Accumulation/Distribution - Divergence...... 2-10 Parameters...... 2-10 OBV-C On Balance Volume - Crossover ...... 2-11 Parameters...... 2-11 OBV-D On Balance Volume - Divergence...... 2-12 Parameters...... 2-12 VPT-C Volume/Price Trend (Smoothed) - Crossover ...... 2-13 Parameters...... 2-13 VPT-D Volume/Price Trend - Divergence...... 2-14 Parameters...... 2-14 VPT-P Volume/Price Trend - Peaks...... 2-15

Parameters...... 2-15 VPT-T Volume/Price Trend - Trending...... 2-16 Parameters...... 2-16

Chapter 3 Strategies Volume Systems 2.0 Power Strategy ...... 3-17 Volume Divergence Strategy ...... 3-18 The Volume Systems Strategy ...... 3-19 Stops ...... 3-20 VS2 Stop ...... 3-20 Parameters...... 3-20

Chapter 4 Volume Heat Analysis Supply and Demand ...... 4-21 The Professionals...... 4-21 The Missing Link ...... 4-23 The Volume Heat Indicator...... 4-24

Volume Systems 2.0 User Guide vi nirvanasystems.com 1 Getting Started

Introduction

Congratulations on purchasing the most advanced volume analysis suite available!

Volume is the lifeblood of any market. We know that it is the imbalance in supply and demand that makes a market move. And closely related to this is the concept of liquidity-how rapidly a market will absorb our shares when we decide to sell them.

A quick look at any chart will tell you that trading volume is not uniform, but rather, comes in waves or spikes. We know that on large volume days, sudden buying or selling has entered the market for a reason, and depending on supply and demand for the shares, price will either continue a prior trend or form a reversal.

Volume Flow analysis is the study of price movement in the context of these unusual volume events. In Volume Systems 2.0, we built several indicators designed to show us how much movement potential exists in a chart at the point one of these events occurs.

Installing Volume Systems

Follow these instructions to install the Volume Systems 2.0 plug-in: 1. Using Internet Explorer go to: http://www.nirvanasystems.com/oti/downloads/all/index.asp?Prodcode=147 2. Enter your Nirvana ID and Password. 3. Click Login. 4. Follow the instructions that appear in the installation wizard dialog boxes. Registering the Software

Before you can use Volume Systems, you must register the software. In order to register, you will need your Nirvana customer number and password, which are supplied on your invoice or confirmation email. 1. Click Help»Registration. 2. Click Get My CD Keys and your registration file will be updated automatically with your new Volume Systems 2.0 module key. product

Figure 1-1. Product Registration Dialog Box

Once your software is installed and registered, the volume systems, indicators, and strategies will be available for use in OmniTrader and VisualTrader.

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Volume Indicators

Volume System 2.0 includes four indicators to use as visual confirmation on the charts. The first two are based on capital flows into and out of a stock, allowing you to gauge what the “smart money” is doing. The second two indicators come as a result of volume weighting moving averages. With this type of smoothing, averages tend to hug price better around turning points.

Volume Flow Oscillator

The Volume Flow indicator measures the flow of capital into and out of a given stock. Similar to on balance volume, this indicator volume weights the average price movement to arrive at a raw VFO value. The raw VFO is then smoothed by a moving average to get the value of the VFO indicator.

Parameters • Periods—The number of periods used for the average in the calculation of the raw VFO. • Smoothing—The number of periods used for the moving average which smoothes the raw VFO.

Volume Heat Indicator

Based on the VFO indicator, the volume heat indicator gives a visual indication into the flow of capital into and out of a given stock. By measuring VFO relative to the levels given by the bandwidth parameter, the Volume Heat indicator will color a volume histogram: Red indicating bearish volume and lower values of the VFO, Green indicating bullish volume and higher values of VFO.

Parameters • Periods—The number of periods used for the average in the calculation of the raw VFO. • Smoothing—The number of periods used for the moving average which smoothes the raw VFO. • Bandwidth—Specifies the levels which represent maximum and minimum colorings. • Contrast—Allows the user to adjust the contrast of the histogram.

Volume Weighted Moving Average

The volume weighted moving average indicator, weights each bar according to its volume before taking the simple moving average. This results in bars with higher volume getting more weight in the averaging calculation. The higher weighting often results in this average being "faster" around turning points because the increased volume near these zones make the average tighten up, hugging closer to price.

Parameters • Periods—Defines the number of periods used in the volume weighted average.Volume Weighted MACD.

Volume Weighted Moving Average Crossover Divergence

Similar to a classical MACD, the VWMACD functions by looking at the difference between two volume weighted moving averages. • Short Periods—Specifies the number of periods used for the short term moving average. • Long Periods—Specifies the number of periods used for the long term moving average.

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Volume Systems

The Volume Systems 2.0 Module includes four new systems used for signal generation in the new Volume Systems 2.0 Strategies. Also included are the seven volume systems from the original Volume Systems plugin.

Dual Volume Flow System

This system generates signals based on the crossover of two separate VFO's. The number of periods used for the raw VFO is the same between the two curves, but the smoothing periods varies for each.

Parameters • Raw VFO Periods—Number of periods used for the Raw VFO Calculation. • 1st Moving Average Periods—Number of periods for the Short Term VFO. • 2nd Moving Average. Periods—Number of periods for the Long term VFO.

Figure 2-1. Dual Volume Flow System

Volume Flow Divergence System

This system generates signals when it detects a divergence between price and the Volume Flow Oscillator. The divergence is base on the slope of successive pivot points on the price chart vs. the slope between successive pivots on indicator. There is also a trend consideration to ensure that the divergence is well formed.

Parameters • Periods—Specifies the number of periods used in the raw VFO calculation. • Smoothing—The number of periods used for the moving average which smoothes the raw VFO. • Sensitivity—Specifies the sensitivity of the pivot point algorithm on the indicator. • ATR Periods—Specifies the ATR period for the pivot calculation on the indicator. • Price Sensitivity—Specifies the sensitivity of the pivot point algorithm on price. • Price ATR Periods—Specifies the ATR Period for the pivot calculation on price. • Pivot Tolerance—Specifies the maximum number of bars pivots can be out of alignment and still generate a signal.

Figure 2-2. ACD-C: Accumulation/Distribution Crossover System

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Volume Weighted MACD Crossover (VWMACD-C)

This system generates signals when a Volume Weighted MACD line crosses over its trigger line which is formed by taking an additional moving average of the MACD.

Parameters • Trigger Periods—Specifies the number of periods used for the trigger line. • 1st Moving Average Periods—Number of periods for the Short Term Moving average in the VWMACD • 2nd Moving Average Periods—Number of periods for the Long term Moving average in the VWMACD.

Figure 2-3. VWMACD-C: Volume Weighted MACD Crossover

Volume Weighted MAC Divergence (VWMACD-D)

This system generates signals when it detects a divergence between price and the Volume Weighted MACD. The divergence is base on the slope of successive pivot points on the price chart vs. the slope between successive pivots on indicator. There is also a trend consideration to ensure that the divergence is well formed.

Parameters • Short Periods—Short Periods parameter of the MACD. • Long Periods—Long Periods parameter of the MACD. • Sensitivity—Specifies the sensitivity of the pivot point algorithm on the indicator. • ATR Periods—Specifies the ATR period for the pivot calculation on the indicator. • Price Sensitivity—Specifies the sensitivity of the pivot point algorithm on price. • Price ATR Periods—Specifies the ATR Period for the pivot calculation on price. • Pivot Tolerance—Specifies the maximum number of bars pivots can be out of alignment and still generate a signal.

Figure 2-4. VMWACD-D: Volume Weighted MAC Divergence

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ACD-C Accumulation/Distribution - Crossover

Accumulation/Distribution attempts to track the relationship between price and volume and provide a measure of whether a security is being accumulated (bulls in control) or distributed (bears in control). Accumulation Distribution is an enhancement of the On Balance Volume indicator. It first compares opening and closing prices to the trading range for the period and then uses this information to weight the volume traded.

The ACD-C system makes use of two moving averages of the ACD indicator with a boundary to help eliminate whipsaws.

Parameters • Shorter Moving Average (Periods)—The first moving average of the ACD indicator. • Longer Moving Average (Periods)—The second moving average of the ACD indicator. • Upper/Lower Bound % of Volume—A percentage of the volume value for each data period that acts as a buffer for signal generation.

Figure 2-5. ACD-C Accumulation/Distribution Crossover System

ACD-D Accumulation/Distribution - Divergence

ACD-D looks for divergences between volume and price action, which is an indication that the current trend is weakening. OmniTrader bases divergence measurements on significant highs and lows as defined by the system parameters.

Parameters • Zig-Zag Percentage—Percentage move of the indicator value required for a valid zig-zag point. • Zig-Zag Periods (minimum)—The minimum number of data periods from one zig-zag point to the next required.

Figure 2-6. ACD-D: Accumulation/Distribution Divergence

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OBV-C On Balance Volume - Crossover

The On Balance Volume (OBV) indicator was developed by Joseph Granville and is explained in his book Granville's New Strategy of Daily Stock Market Timing for Maximum Profit.

Parameters • Moving Average (Periods)—Moving average of the OBV indicator. • Upper/Lower Bound % of Volume—A percentage of the volume value for each data period that acts as a buffer for signal generation.

Figure 2-7. OBV-C: On Balance Volume Crossover

OBV-D On Balance Volume - Divergence This system generates signals when it detects a divergence between price and the On Balance Volume Oscillator. The divergence is base on the slope of successive pivot points on the price chart vs. the indicator.

Figure 2-8. OBV-D On Balance Volume - Divergence

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VPT-C Volume/Price Trend (Smoothed) - Crossover

Volume/Price Trend is a momentum indicator, with the price weighted by volume. The difference of the past two closing prices is calculated and multiplied by volume to create a moving total over n periods.

Parameters • Indicator Periods—Number of periods used to calculate indicator value. • Mov Avg #1 Periods—Number of periods used to calculate short moving average of the indicator. • Mov Avg #2 Periods—Number of periods used to calculate the long moving average of the indicator.

Figure 2-9. VPT-C: Volume /PRice Trend Crossover

Figure 2-10.

VPT-D Volume/Price Trend - Divergence

This system generates signals when it detects a divergence between price and the Volume/Price Trend indicator. The divergence is base on the slope of successive pivot points on the price chart vs. the indicator.

Parameters • Indicator Periods—Number of periods in indicator calculation. • Zig Zag Percentage—Percentage move of the indicator value required for a valid zig-zag point. • Zig Zag Periods (minimum)—The minimum number of data periods from one zig-zag point to the next required.

Figure 2-11. VPT-D: Volume Price Trend Divergence System

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VPT-P Volume/Price Trend - Peaks

This system trades long when VPT moves below the Lower boundary and reverses direction (forms a valley). Conversely, it trades short when the VPT forms a peak above the Upper boundary.

Parameters • Indicator Periods—Number of periods in indicator calculation • Boundary (Volume MA%)—Percentage of volume moving average (positive and negative values) used to create boundary.

Figure 2-12. VPT-P: Volume/Price Trend Peak System

VPT-T Volume/Price Trend - Trending

The Volume Price Trend - Trending system generate signals as the volume price trend crosses through a buffer around the zero-line. The buffer is used to help eliminate whipsaws in consolidating markets.

Parameters • Indicator Periods—Number of periods in the indicator calculation • Volume Moving Average Periods—Moving average of volume to use for boundary calculation. • Boundary: % of Volume MA—Percentage of volume moving average (positive and negative values) used to create boundary.

Figure 2-13. VPT-T: Volume/Price Trend Trending System

Volume Systems 2.0 User Guide 16 nirvanasystems.com 3 Strategies

The Volume Systems 2.0 package includes two new mechanical strategies: the VS2 Power Strategy and the Volume Divergence Strategy. This is in addition to the strategy included in the original module. Volume Systems 2.0 Power Strategy

The Volume Systems 2.0 Power Strategy is a mechanical strategy that uses weighted volume to find long-term opportunities. This strategy uses the DVF-C and VMACD-C to detect volume fluctuations prior to a big reversal. It combines them to look for tell-tale signs that the professionals are beginning to accumulate a stock.

Figure 3-1. Signals Generated by the Volume Systems Power Strategy

Volume Divergence Strategy

The Volume Divergence Strategy detects sudden reversals. This strategy uses the Volume Divergence Systems to generate trading signals. With divergence signals, a disparity between the slope in the price chart and the slope of the indicator often predicts a sudden rally.

Figure 3-2. Signal on CVS Generated by the Volume Divergence Strategy

The Volume Systems Strategy

The Volume Systems Strategy is based on the various Volume Systems from the Volume Systems 1 Plug in. The strategy employs OmniTrader's built in optimization methods to generate volume-based prospecting signals on an End of Day basis.

Figure 3-3. Signal on CL Generated by the Volume Systems Strategy

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Stops

VS2 Stop

This stop manages a trade in a similar manner to a trailing profit stop. It was designed to be used with our Volume Systems 2 Power Strategy to capture longer term trades. It differs from a traditional Trailing profit stop in that it only executes when the close is through the stop level, allowing it to avoid getting wicked out by intraday movement. Note that this stop is NOT a level based stop, so its exits are always either at the close price or at the open of the next bar.

Parameters • Threshold—Specifies the distance that price must move to the gain side in order to activate the stop. • Cushion—Specifies the distance between the loss side pivot point and where the exit will be placed. • ATR Periods—Specifies the number of periods used to calculate the ATR value. (Used only if ATR’s are the specified unit for the exit.) • Time Limit—The number of bars that the exit will be active. If the value is set to zero, then there is no time limit used for the exit.

Supply and Demand

The analysis of volume to predict future market prices has been used for more than 100 years, starting with the innovative methods of Richard Wyckoff in the early 1900's. In recent years, advances in these techniques have been made using Volume Spread Analysis to decode market movements using certain principles regarding supply and demand.

The concept is simple and intuitive. When demand exceeds supply, a markets will rise. When supply surpasses demand, prices fall. If supply and demand are equal, price will remain the same. By analyzing volume data in addition to the price chart, it becomes possible to not only understand the historical roles of supply and demand, but also to predict supply and demand conditions for the near future. The Professionals

The key to predicting future supply and demand is the behavior of the large professional stock traders, sometimes referred to as "professional operators" or the "smart money".

These major market players have a huge effect on the movement of stocks as they consistently "fleece" the less savvy smaller traders. The chart and discussion to the right explains the mechanics of how this happens. This "shell game" has been going on since the early 1900's, yet to most small traders the process has remained entirely invisible.

Figure 4-1. Phases of Market Movement

The Missing Link

The key piece of this puzzle that most traders miss is volume. When the professionals accumulate or distribute shares, they leave a tell-tale "signature" in the form of the volume and price data. In the chart to the right you can see large volume spikes around the key reversal points. On these extreme movement days, the professionals' actions are directly reflected in the volume. For example, on June 23, 2009 a relative low bar was formed on CYT. We see a large volume spike on that day, showing us that buying AND selling increased to form an accumulation event.

Figure 4-2. Volume Heat Indicator shows spikes as pros accumulate and distribute shares of CYT

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The Volume Heat Indicator

To capture volume flow, we created a new indicator called Volume Heat which helps us visualize the overall movement of money into and out of a stock. The indicator is shown in both of the examples to the right.

With Volume Heat, not only can you see the professionals entering and exiting the market, but also the resulting imbalance between supply and demand as the heat shifts from bullish to bearish and vice versa.

In the days following the major accumulation bar on February 10th, Sprint shows marked shift in the balance of supply and demand. The Volume Heat Indicator undergoes a color shift from red to gray then finally to green. This is due to the major accumulation by the pros removing supply from the market place. Until they sell (at the next distribution point in the chart) the market will have a solid upside bias.

Volume Heat will let you see whether an accumulation or distribution event has just occurred, giving you an important piece of information that will improve your odds.

Figure 4-3. Volume Heat shows supply and demand imbalances on Sprint