Volume Cloud Indicator

How to predict support & resistance levels using volume?

volume cloud low resolution

Volume by itself contains too much noise to be a useful indicator, so several tools are available to make volume more useful: RoC (rate of change), MF (money flow), OBV (on balance volume) to name a few. While they might accurately point to overbought and oversold levels, what they lack is at what price level this occurs. This is where the volume cloud offers an advantage. This indicator provides a graphic distribution of volume inside the price chart over a given time frame.

The first chart will be used the explain. As you can see, the volume is too noisy to be of any use. What we do to make this more intuitive is the following:

  • In this example we divide price in blocks of 5 points (the resolution).
  • For each day we calculate the price range (high – low).
  • We divide the volume for this day over the price range. For example if the price rangeĀ  is 10 points on a given day it will fit inside 2 blocks (of 5 point). We assign each block with half the volume in this case.
  • We do this for each day
  • Each day we decrease the influence of the last days volume. For example, if we set the ‘influence’ range to 50 days, we decrease the value by 2% each day. So after 50 days the volume of day one is reduced to nothing.
  • So each colored cell in the chart shows the volume of the current day plus decreased volume of past days. So today counts 100%, yesterday counts 98% etc.
  • Now we have a value for each cell. We color code the cells based on their value. Red is the highest, green middle, and blue for low impact.

The next chart shows how this works in reality. We’ve set the resolution to 1 point so it does not look pixelated.

volume cloud high resolution
In March 2012, volume is building up (area A). The effect of this volume dissipates over time. When the price reached the same level in July 2012, the effect of the past has dissipated too much and the price moves right through it.

In area B, price is moving in a narrow trading range, so a lot of volume is being built up around this price level. The red area C is larger than it was at area A.

Now when price reached a level in Feb-Mar ’13 all the past volume build up acts as support and price is bouncing from there.

This visualization supports the idea of support- and resistance levels used in basic technical analysis.

While just looking at volume this information is impossible to see.

Unlike traditional volume indicators, this indicator involves time and is thus leading! It can ‘predict’ future support and resistance levels.