This is the 6th post service inward the serial looking at indicators that I accept flora useful inward tracking the market's short-term behavior. Previous posts inward the serial are linked below. In this post, nosotros expect at a mensurate I telephone yell upward relative volume. In the nautical chart above, relative book (red line) is plotted against SPY for Friday, 12/30/16.
Relative book is genuinely a ratio of electrical flow one-minute book to the average book for that minute. Thus, for instance, if the electrical flow book at 9:39 AM is 200,000 shares too 9:39 AM book averages 100,000 shares, the relative book is 2.0. When nosotros stance book inward this manner, nosotros tin apace run into if marketplace moves are supported past times important participation.
Notice how relative book started the twenty-four hours good elevated too stayed elevated for almost the session. This is truthful for many tendency days: it is the additional participation of directional players that sustains the marketplace move. The trader watching relative book early on inward the twenty-four hours had an first-class say that this was abnormally high participation--and it was skewed to the downside.
Conversely, days inward which relative book persistently stays below 1.0 are ones inward which moves cannot attract meaningful participation. This leads to frequent reversals of those moves inward a make environment. Very often, we'll run into relative book tail off equally marketplace moves mature, equally novel high or depression prices neglect to attract added participation. This oft precedes reversals, equally nosotros saw during the 10 AM hr of trading above.
When cost breaks out of a make on sustained elevated relative volume, nosotros accept a corking indication that the novel prices are attracting fresh participation, which makes the breakout less probable to endure a fakeout.
The fundamental to agreement relative book is that, when nosotros run into elevated participation inward the market, that elevation typically comes from directional participants. If we're going to larn a momentum/trend move, nosotros postulate the players to sustain the higher or lower prices. The waxing too waning of relative book tells us where the market's auction is attracting activeness too where it is shutting it off--an essential distinction for short-term traders.
Previous Posts inward the Series:
* Tracking Instantaneous Demand too Supply
* Tracking Multiday Market Strength too Weakness
* Tracking Market Breadth too Strength/Weakness
* A Unique Application of VWAP to Gauge Market Strength
* Tracking Market Strength With Intraday New Highs too Lows
.
