Studies: Equi-Volume Bars
Ensign Software's latest release introduces new features that are absolutely delightful, particularly for the trader who appreciates and wants to exploit the role volume plays in the market. This article focuses on Howard Arrington's implementation of Equi-Volume, but will touch on another key new feature, Bid/Ask Volume.
The Equivolume concept was developed by Richard W. Arms, Jr., who in 1967 also developed another important contribution, the Arms Index or TRIN, also a volume-based tool. Mr. Arms originally calculated both TRIN and Equivolume, along with the companion Volume Adjusted Moving Average (VAMA) and Ease of Movement, using slide rules and later, calculators. What a treat it is for the modern trader to simply right click and within a few strokes, apply these concepts to any chart, any time frame. Please see the Resources at the end of the article for further reading on how Mr. Arms applies his ideas.
Put in its most simple terms, a box is drawn with the high and low as top and bottom. The width of the box is determined by the volume traded during that bar's time frame. From Mr. Arm's book Volume Cycles in the Stock Market:
According to Mr. Arms,
"The shape of each Equivolume box provides a picture of the supply and demand for the security during a specific trading period. Short and wide boxes (heavy volume accompanied with small changes in price) tend to occur at turning points, while tall and narrow boxes (light volume accompanied with large changes in price) are more likely to occur in established trends."
For reference, here is an image showing Mr. Arm's graphical view of Equivolume.
[image sources: armsinsider.com]
Ensign Software Equivolume Implementation
Ensign's implementation of Equivolume is quite sophisticated and allows for a number of display and study options. Each feature deserves elaboration so as to better appreciate the possibilities. Here is a summary, followed by examples showing how each feature can be used.
- The "X-Axis" is uniform, allowing trendline and cycle studies not readily implemented with the classic display;
- Equivolume can be applied to all price displays: time, tick, range, and volume, for which tick volume is substituted for trade volume;
- Bars can be displayed as Equivolume Candles, allowing wick information not visible with the classic box display; and
- Bid/Ask Volume can be incorporated into the Equivolume display and, using Ensign Flutes, reflect the classic "box" display.
In the Arms implementation, the "time axis" is time modulated by volume. As such it is irregularly narrowed or widened by the volume of the boxes. A clever feature in Mr. Arrington's implementation is to center the candles, thus keeping a uniform X-axis, and use visual overlap to display the variable widths. This allows use of classic indicators and draw tools to be accurately implemented. The amount of overlap is user selectable, as is the net space between bars. "Crowding" can be alleviated by increasing the space between bars. The later is particularly useful to swing traders who have time on their side when evaluating price action.
Time Frame Flexibility
The advent of price display using range, tick, and volume has opened up trading strategies geared to reveal areas of reversal or congestion that traders can exploit. Because Volume represents commitment at price, incorporating Equivolume display on range (or volume) bars adds yet another dimension time-based volume flow may mask. Nevertheless, the "read" is the same: fat bars show heavy participation, thin bars indicate light participation.
Range bars are formed as price moves through the specified price increment, in the following example, 8 points. When range bars overlap, price is congesting; fluid moves with little overlap indicate buyers (or sellers) are enthusiastically supporting movement.
Volume bars are exceptional in that when displayed in the Equivolume style, they are somewhat counterintuitive as tick count is the measure.
To clarify: A volume bar consists of a fixed number of contracts traded, in this example, 1000 contracts. A tick may consist of any number of contracts. So a 100-tick volume bar of 1000 contracts represents an average of 10 contracts per tick ("small" traders). A 5-tick 1000-contract bar would be 200 contracts average per tick (likely block trades).
Thus, a fat volume bar is composed of many ticks, ie, "smaller" players; whereas a thin volume bar represents a few or even a single tick of large volume, very likely block trades. This is one visual "inversion" traders using Equivolume style on volume bar charts must keep in mind.
Shown below are "Ensign Rockets". Equivolume is limited to the "body" of the candle, so that the tails are still visible, providing additional sentiment information. The bars have the "3D" option, which complement Equi-Volume very nicely. Additionally, the lower volume panel displays up/down volume with corresponding width properties. This is particularly useful for reading doji (equal open/close) bars.
Although I refer to candles, Ensign's implementation also draws Equi-Volume traditional bars and will even draw Line-on-Close displays thicker and thinner.
The Ensign "Flute" display best approximates the original box style, but adds open and close hash marks. For this example, I've used the Ask/Bid Volume coloring option, where the "split" on each bar shows volume at the ask (green) and bid (red). So not only do you see volume participation, but also the bias in the volume is clearly indicated.
Note: The Ensign Volume Weighted Moving Average is not the same as Richard Arms VAMA, but does a fine job nonetheless.
An important idea to keep in mind is that Equivolume width is a primarily a visualization, not an absolute, although, one could indeed make it an absolute and use it in a formula, as Arms mentions in his book. However, our eyes are capable of amazing discrimination without having to resort to a number or calculation. That is why consistent use makes for good experience in deciding if they are a tool for you.
Going a step further, I speculate that neither Arms or Howard use any "secret" factor to weight each bar, but as I mention, I wouldn't know. My own work with volume has repeatedly taught me that any significant impact volume has on the current price bar is highly relative to the immediately surrounding volume, usually within a few bars, far more so than say, volume bars even twenty bars back. So, if there is any "weighting" , it would be to "normalize" the maximum width relative to some number of surrounding bars. As Equivolume is primarily a visualization, this type of normalization would have small, if any, impact on the quality of the representation.
The question then becomes, how do I know that this particular "fat boy" or "Olive Oyl" bar is meaningful? Like with pitchfork, my first answer is "by repeated study and personal experience through often use." The second answer is that one can access volume impacts by also using a higher time frame. Including more bars in the speculated normalization would, in my opinion, dilute the usability of the width, similar to the way a moving average flattens the longer you make it.
So, to summarize, while my curious nature prefers to know the innards of indicators, I'm less fussy about the why and far more interested that what features are there are tailorable enough for my trading needs. I'd say that as long as Equivolume yields tradable signals, then I'll use them until they no longer do so.
Trading with Equivolume is a free PDF book provided by Richard Arms on his ArmsInsider.com website. This little book is well worth your time if you are not yet familiar with this charting technique. Strategies he explores, generously accompanied by charts, are turning points, breakouts, continuation, support and resistance, and gaps. While his focus is on short term swing trading, my own experience, as illustrated herein, show there is great potential for intraday traders to incorporate Equivolume ideas into their trading.
Trading Without Fear (1996) Expands on Equivolume, which Arms considers an indicator of fear and greed in the market, as well as the companion indicators Ease of Movement and Volume Adjusted Moving Average (VAMA), that can take into account float and total shares for stock trading.
Profits In Volume: Equivolume Charting (1999) Richard Arms' original work on Equivolume.
Article by Ana Maria Gallo
Related Volume Topics on Ensign's web site: (click on a link to read the article)
| contact us
Ensign Software, Inc., 113 Stillwater Drive, Idaho Falls, ID 83404 Support: 801-328-1382 Billing: 208-552-2230
(c) 2014 Ensign Software, Inc. All Rights Reserved
Last modified 8/4/11 4:06 PM