Effective volume | The Large Effective Volume Flow (LEVF) indicator
The Effective Volume

Each line of Table 3 represents a snapshot of what happened during the last one minute of trading. Three types of information are expressed at each line:
  1. The volume: there has been some buying and selling of a certain number of shares
  2. The fight: there has been a battle between buyers and sellers, bulls and bears, hence the Open, High, Low and Close of the price
  3. The outcome: most importantly there has been an outcome to the battle. The outcome is the close of the current time interval compared to the close of the previous time interval: the price increased or decreased, we will call this information a "price inflection".

The work that is presented here is based on the fact that an analysis of "price inflections" is critical to knowing why trends are built or broken. A price inflection is the signal that the equilibrium between buyers and sellers is broken. A price inflection indicates that either the Bid or the Ask was taken out, indicating that either buyers or sellers broke the balance.

Consecutive price inflections in the same direction have the potential to start new trends.

Table 3: Minute-By-Minute data type

We define the Effective Volume as the volume that is responsible for a price inflection.
In Table 3, we can see that there are price inflections at 15:51, 15:53, 15:54, and 15:57.


The Effective Volume is calculated by using the following formula, which is a modified version of Larry Williams' A/D (Accumulation/Distribution) formula:
Do not forget to multiply the result by the price inflection direction (+1 or -1) if the price increased or decreased
(ABS (Closei-1 - Closei )+ PI) / (Highi - Lowi + PI)

Closei-1 = Closing price corresponding to Time Interval (i-1): TIi-1
Closei = Closing price corresponding to Time Interval (i): TIi
Highi = Max (Highi , Closei-1)
Lowi = Min (Lowi , Closei-1)
PI = Price Interval (usually US$ 0.01).
ABS= Absolute value
If (Closei-1 = Closei ) then EV = 0
As you can see, the Larry Williams formula was changed in two ways:
  1. I replaced the Open of the time interval by the Close of the previous time interval. Of course, I had to adapt the High and the Low of the current time interval to the value of the Close of the previous time interval.
  2. I added the PI number, usually 0.01, to take into account the very small variations that occur during one time interval.


Table 4: Effective Volume

Table 4 represents the Effective Volume as calculated using the above formula.
If we multiply the Effective Volume number by the direction of the price inflection and plot such results on a time scale, we get a typical volume flow figure.

The Large Effective Volume Flow (LEVF) indicator

Large funds cannot move without leaving heavy footprints. One good relevant trace that we can find is in volume analysis, since we can assume that professional players need to place larger orders than retail players.

Even if hedge funds account for the lion's share of trading on the NYSE, we could still say that the majority of the trades (mainly small trades) originate from retail players. The simple difference is that hedge funds place larger orders than retail players (or a succession of mid-size orders). The consequence is that retail players make everything rather foggy when you look at all the data. What we therefore need is a reliable method to filter out the noise generated by retail players; we can then focus only on large players.

Using the Effective Volume Flow analysis model and separating the minute-by-minute volume by size allows filtering out such a noise. The filtering calculation is shown on Table 5 (separation size of 10,000 shares). The plotting of the LVS_VF (Large Volume Size Volume Flow) and the SVS_VF (Small Volume Size Volume Flow) results allows separating small from large players.


Table 5: Volume size separation

The separation of the effective volume flow analysis by volume size allows us to study possible divergences between price and volume patterns.
This method can be used in several instances:
  1. A flat trading range will probably break in the direction of the LEVF.
  2. A price uptrend with a negative LEVF indicates that problems lie ahead.
  3. A price downtrend with a positive LEVF indicates that the downtrend is not sustainable.

The section "Trading Examples" shows you how to use Effective Volume.

Indeed, if you are a fund that wants to buy one million shares of a stock whose daily volume is 500K shares, even if you extend your buying within 4 trading days, you will still be responsible for a 50% increase of daily volume.That will certainly appear on the minute-by-minute analysis.