Indicators
Volume Orderbook

Volume Orderbook Trading Indicator

By
Zeiierman
on
April 27, 2024

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The Volume Orderbook indicator is a volume analysis tool that visually resembles an order book. It’s used for displaying trading volume data in a way that may be easier to interpret or more intuitive for certain traders, especially those familiar with order book analysis.

This indicator aggregate and display the total trading volume at different price levels over the entire range of data available on the chart, similar to how an order book displays current buy and sell orders at different price levels. However, unlike a real-time order book, it only considers historical trading data, not current bid and ask orders. This provides a ‘historical order book’ of sorts, indicating where most trading activities have taken place.

Summary

This is a volume-based indicator that shows the volume traded at specific price levels, highlighting areas of high and low activity.


Calculations

The algorithm operates by calculating the cumulative volume traded in each specific price zone within the range of data displayed on the chart. The length of each horizontal bar corresponds to the total volume of trades that occurred within that particular price zone.

In essence, when the price is in a specific zone, the volume is added to the bar representing that zone. A thicker bar implies a larger price zone, meaning that more volume is accumulated within that bar. Therefore, the thickness of the bar visually indicates the amount of trading activity that took place within the associated price zone.

How to use

The Volume Orderbook indicator serves as a beneficial tool for traders by identifying key price levels with a significant amount of trading activity. These high-volume areas could represent potential support or resistance levels due to the large number of orders situated there. The indicator’s ability to spotlight these zones might be particularly advantageous in pinpointing breakouts or breakdowns when prices move beyond these high-volume regions. Moreover, the indicator could also assist traders in recognizing anomalies, such as when an unusually large volume of trades occurs at unconventional price levels.

  • Identify Key Price Levels: The indicator highlights high-volume areas where a significant number of trades have occurred, which could act as potential support or resistance levels. This is based on the notion that many traders have established positions at these prices, so these levels may serve as significant areas for market activity in the future.
  • Volume Nodes: These are the peaks (high-volume areas) and troughs (low-volume areas) seen on the indicator. High-volume nodes represent price levels at which a large amount of volume has been traded, typically areas of strong support or resistance. Conversely, low-volume nodes, where very little volume has been traded, indicate price levels that traders have shown little interest in the past and could potentially act as barriers to price. It’s important to note that while high trading volume can imply significant market interest, it doesn’t always mean the price will stop or reverse at these levels. Sometimes, prices can quickly move through high-volume areas if there are no current orders (demand) to match with the new orders (supply).
  • Analyze Market Psychology: The distribution of volume across different price levels can provide insights into the market’s psychology, revealing the balance of power between buyers and sellers.
  • Highlight Potential Reversal Points: The indicator can help identify price levels with high traded volume where the market might be more likely to reverse since these levels have previously attracted significant interest from traders.
  • Validate Breakouts or Breakdowns: If the price moves convincingly past a high-volume node, it could indicate a strong trend, suggesting a potential breakout or breakdown. Conversely, if the price struggles to move past a high-volume node, it could suggest that the trend is weak and might potentially reverse.
  • Trade Reversals: High-volume areas could also indicate potential turning points in the market. If the price reaches these levels and then starts to move away, it might suggest a possible price reversal.
  • Confirm Other Signals: As with all technical indicators, the “Volume Orderbook” should ideally be used in conjunction with other forms of technical and fundamental analysis to confirm signals and increase the odds of successful trades.

Summary

The Volume Orderbook indicator allows traders to identify key price levels, analyze market psychology, highlight potential reversal points, validate breakouts or breakdowns, confirm other trading signals, and anticipate possible trade reversals, thereby serving as a robust tool for trading analysis.

Settings

  • Source: The user can select the source, the default of which is “close.” This implies that volume is added to the volume order book when the closing price falls within a specific zone. Users can modify this to any indicator present on their chart. For example, if it’s set to an SMA (Simple Moving Average) of 20, the volume will be added to the volume order book when the SMA 20 falls within the specific zone.
  • Rows and width: These settings allow users to adjust the representation of volume order book zones. “ROWS” pertains to the number of volume order book zones displayed, while “WIDTH” refers to the breadth of each zone.
  • Table and Grid: These settings allow traders to customize the Volume order-book’s position and appearance. By adjusting the “left” parameter, users can shift the position of the Volume order book on the chart; a higher value pushes the order book further to the right. Additionally, users can enable “Table Border” and “Table Grid” options to add gridlines or borders to the Volume order book for easier viewing and interpretation.

Read more

The hypothetical “Volume Orderbook” indicator serves as a tool to visualize the cumulative volume of trades executed at different price levels over a specific period. It can be particularly useful for traders as it identifies crucial price levels associated with high and low trading volume, which often correspond to areas of market support, resistance, and price interest.

High volume areas, or “volume nodes,” denote levels where a significant number of trades have taken place, potentially transforming these levels into zones of support or resistance. This is predicated on the assumption that many traders have entered transactions at these points, leaving a substantial amount of open interest ready to defend their positions.
On the other hand, low-volume nodes represent price levels at which relatively little volume has been traded, suggesting less market interest in the past. However, these can also act as potential barriers for price movements.

The indicator can assist traders in identifying key price levels and analyzing market psychology by revealing the balance of power between buyers and sellers. High-volume areas could potentially be reversal points, as these zones have previously attracted considerable market interest. If the price struggles to surpass a high volume node, the trend could be weak and potentially set to reverse.

The strength of breakouts or breakdowns can also be gauged using this indicator. If the price convincingly moves past a high-volume node, it could signify robust buying or selling pressure, indicating a potential breakout or breakdown. Conversely, if the price struggles to move beyond a high volume node, it could suggest a weak trend, possibly hinting at a reversal.

However, like all technical indicators, the “Volume Orderbook” should ideally be used alongside other technical and fundamental analysis methods to confirm signals and increase the probability of successful trades. For instance, observing high-volume areas could aid in spotting potential turning points in the market. If the price reaches these levels and starts to reverse, it could indicate a possible price change.
Therefore, the “Volume Orderbook” indicator could be a valuable addition to a trader’s toolkit, helping to identify key price levels, analyze market behavior, highlight potential reversal points, validate breakouts or breakdowns, and confirm other trading signals.

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