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1989issue C121-7

Constructing a volume percentage ratio from advance-decline flow

Rebuild market volume as a signed participation stack: total turnover, separate advance and decline streams, then a volume percentage ratio. A new extreme in the price average is then read as confirmation or non-confirmation inside a short chart period, not as a single volume line that follows price.

  • Build participation as three layers: a smoothed total-volume line, separate advancing and declining volume averages, and a volume percentage ratio of those two streams as shares of total volume.
  • Judge the ratio only by its position against earlier points in the same period. Discard the absolute reading.
  • Confirmation is a new period high or low printed by both the price average and the paired volume series. Non-confirmation, or divergence, is a price extreme the volume series does not repeat, and that mismatch is the reversal hypothesis.
  • Keep the chart period inside the range specified for each series. Advancing volume is assigned to rebound highs after a top and is treated as uninformative at bottoms. Declining volume is assigned only to short-term bottoms.
Entries in this reading3 entries
Current trackOn-balance volume88 readingsPrice-indicator divergence167 readingsVolume-price analysis207 readings

From one volume line to a signed stack

A basic market volume line is built as an exponential moving average of total volume with a 0.04 exponential smoothing constant and is plotted on a conventional high-at-top vertical scale. Used alone, that line is an unsigned record of turnover.

On-balance-volume, in the sense used here, is a signed-volume construction that accumulates participation by separating advancing-issue volume from declining-issue volume instead of treating all turnover as one unsigned series. Upside participation is isolated as an exponential average of advancing-issue volume with a 0.04 exponential smoothing constant. Downside participation is isolated as an exponential average of declining-issue volume with the same constant.

How the pane is scaled

The declining-volume series is drawn on an inverted vertical scale so its smallest readings sit at the top of the pane, while the price average remains on a normal scale.

Building the volume percentage ratio

The volume percentage ratio is a short-horizon signed oscillator equal to smoothed upside volume as a share of total volume minus smoothed downside volume as a share of total volume. In this workflow it is constructed by subtracting a 0.1-smoothed exponential average of declining volume as a fraction of total volume from a 0.1-smoothed exponential average of advancing volume as a fraction of total volume.

Each exponential average is seeded with the arithmetic mean of the first five observations and then updated by adding the exponential smoothing constant times the gap between the new observation and the prior average. The exponential smoothing constant is a fraction between zero and one that weights that gap when the average is updated. The total-volume and one-sided series use 0.04. The two shares that form the ratio use 0.1.

Period first, then relative position

Period, here, is the number of trading days shown on the chart. Several of the volume series are unreadable if that window is much longer or shorter than the range specified for them. The volume percentage ratio is specified for chart periods of 50 to 75 trading days.

Only the ratio's position relative to earlier points in the same window is used to judge confirmation or failure to confirm the market average. The absolute reading is discarded.

Confirmation, non-confirmation, and divergence

Volume-price analysis asks whether participation expands, contracts, or fails to match a price extreme before that extreme is accepted as confirmed. Confirmation is a period in which both the price average and the volume series make a new high or a new low. Non-confirmation is a period high or low in the price average that the volume series does not match.

Divergence is a new period high or low in the price average that the paired volume series does not repeat, used as a reversal hypothesis. In this workflow that mismatch is the reversal hypothesis.

Which stream is assigned to which extreme

Advancing-volume is assigned to confirming the rebound high after an initial decline from a top and is treated as uninformative at bottoms. Declining-volume is assigned only to short-term bottoms and is specified for windows of 50 to 200 trading days.

After a cycle low and after a top

After a cycle low, a subsequent strong advance is hypothesized only if the total-volume average turns up within a few weeks. Later in the cycle the ratio is expected to print several non-confirmations before a final high. Advancing-volume is the series that should not join a strong reading on the first bounce after a top.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
11 of 61 in the On-balance volume track
19901-4 pp.Next on On-balance volumeConstructing net positive volume as On-balance volumeNet Positive Volume adds, subtracts, or zeros each period's full volume according to whether the close rose, fell, or was unchanged versus the prior close.
All readings on this track · 61 readings
  1. 1988Cumulative volume trend and 200-session polarity
  2. 1988Three clocks when cumulative volume led price
  3. 1988Payoff index checkpoints for open interest and divergence
  4. 1988Relative strength, stochastics, and on-balance volume as a turning-point stack
  5. 1988Signing volume by open interest change
  6. 1988Case study: weekly on-balance volume with trendlines and a 21-period average
  7. 1988Combining weekly and daily MACD divergences with on-balance volume
  8. 1988Restoring the original tests for market breadth, on-balance volume, and trendlines
  9. 1989Evaluating volume-weighted breadth extremes
  10. 1989Demand oscillator construction with a momentum overlay
  11. 1989Constructing a volume percentage ratio from advance-decline flow
  12. 1990Constructing net positive volume as On-balance volume
  13. 1990Buying-share scale with on-balance volume
  14. 1990Friday-filtered on-balance confirmation lines
  15. 1991Constructing rate-market volume breadth from on-balance volume
  16. 1991Building a breadth composite from on-balance volume breakouts
  17. 1992Constructing a rate-complex volume-breadth index
  18. 1992Constructing a breadth index from on-balance volume
  19. 1992Constructing signed market thrust from issue volume
  20. 1992Constructing indicator phase across averages, volume and bands
  21. 1993Force on-balance volume to agree with itself at slower horizons
  22. 1993Three transforms of market thrust from breadth and volume
  23. 1994Constructing a tick-line momentum oscillator
  24. 1994Constructing a smoothed on-balance tick momentum oscillator
  25. 1994Histogram confirmation and a second-series veto for MACD-family alerts
  26. 1994Constructing a 40-period envelope on on-balance volume
  27. 1996Constructing a matched percent-B volume disparity
  28. 1997Constructing calendar regime overlays and volume-weighted rules
  29. 1997Constructing market thrust from breadth and volume
  30. 1997Constructing on-balance volume as a signed running total
  31. 1997A three-layer construction for a signed volume-force oscillator
  32. 1997Constructing a range-sum volume-force oscillator
  33. 1999On-balance volume confirmation, price-indicator divergence, and bounded exits
  34. 2000A daily long-only confirmation stack on the tether line
  35. 2000A three-filter tether and volume trend system
  36. 2003Constructing finite volume elements as a finite-period money-flow filter
  37. 2003Constructing on-balance volume from signed session volume
  38. 2003On-balance volume as a market-breadth participation ledger
  39. 2003Construct a volatility-adjusted on-balance volume filter before confirming a breakout
  40. 2004Opening and midday ranges as an on-balance-volume breakout case
  41. 2004Constructing a volatility-gated volume-flow measure
  42. 2004Constructing a volume-flow series from on-balance volume
  43. 2004Volume-flow indicator construction from on-balance volume
  44. 2004Volume-flow slope divergence, then separate on-balance-volume and crossover rules
  45. 2004Volume flow and band construction as one inspectable problem
  46. 2004Auditing advance-decline confirmation for scale, horizon, and composition
  47. 2005Bounded market breadth from the Arms index to BRIN
  48. 2006Overnight-hold entry and exit construction
  49. 2007Evaluating Volume-price confirmation versus On-balance volume and MACD
  50. 2009Volume confirmation versus a price advance
  51. 2010Typeahead retrieval of a moving average, on-balance volume, and a stochastic oscillator
  52. 2010Modified volume-price trend and log-price scale alignment
  53. 2010Constructing liquidity accelerometers from advance-decline averages
  54. 2012Failed short cycles as breadth and volume tests
  55. 2016Earnings straddles, implied volatility, and money-flow filters
  56. 2017A volume residual filter and a price projection matrix
  57. 2019Volume-volatility parabola and signed-volume momentum
  58. 2019Separating on-balance volume into breadth and volume
  59. 2020Constructing the obvm signal line
  60. 2020Constructing smoothed on-balance volume with a signal line
  61. 2020Keep neutrality as a first-class input in three-state market data
By fieldIndicators and filters874 readingsBy year1989126 readings
All 88 readings tagged On-balance volume
Also on On-balance volume5 readings
1988Three clocks when cumulative volume led price1990Constructing net positive volume as On-balance volume1991Constructing rate-market volume breadth from on-balance volume1997Constructing a range-sum volume-force oscillator2010Modified volume-price trend and log-price scale alignment