Volume MACD

Volume MACD Indicator Explained

This week, I’m introducing a new indicator I developed a few days ago and have shown in the various trading rooms: the Volume MACD. What is the Volume MACD?

Volume MACD is an indicator coded to resemble a regular MACD, but this indicator will measure volume instead of price like a regular MACD. 

If you want to learn more about the MACD study, you can check out the MACD blog posts here, and if you want to read more about trading with the MACD, you can read about it here.

Volume MACD Example

Value, Avg, & Diff make up the critical pieces of the MACD Indicator Study.

Before I introduce this indicator, let’s take a minute to review what the MACD is and how it works. The MACD is a multipurpose study that shows changes in a price trend’s direction, strength, momentum, and duration. This new MACD does all of that but with volume! 

The MACD is an unbounded oscillator calculated from price data. As a result, we need to look at where this data comes from. There are three series of price data used to develop the MACD.

EMA

They are plugged in using an exponential moving average (EMA) formula. You can review that blog post here if you have not yet reviewed how a moving average is calculated.

Before using this study, take the time to learn stock trading. Our online trading courses are filled with trading strategies where you can apply the volume MACD study.

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How Is Volume MACD Calculated?

Volume MACD is calculated by subtracting the longer moving average (26 EMA) from the shorter moving average (12 EMA) (called the Value Line). They then calculatedate the moving average from that difference (cae Avg Line). The Primary Trend Divider is the Zero Line, and the MACD crosses above and below this line as the moving averages converge, diverge, and cross. This crossover is the trend change confirmation signal. 

The MACD is a trend-following and momentum-measuring indicator. The best of both worlds! How is the MACD developed? The MACD value is developed by converting the EMA’s into an oscillator.

For the trader who relies on confirmation trading signals, a MACD crossover of the Zero Line is considered a primary signal that the trend has officially changed. The MACD is considered a Trend Following indicator because it’s an indicator that looks backward and confirms a trend already in motion. 

Another issue some traders have is that the MACD does not offer overbought and oversold signals. This occurs because the MACD is unbounded, so I’ve developed this indicator.

Crossover

A Bullish Crossover (Buy signal) is given when the Value Line exceeds the average line. A Bearish Crossover (Sell Signal) is given when the Value Line exceeds the average line. These events signal that the trend is accelerating toward the crossover. Make sure to keep an eye on this when trading low-float stocks.

As the picture below shows, the MACD line is called the Value Line, the MACD Average is the average line, and the Zero Line is the Zero Line.

These names are important to understand since I developed the Volume MACD to reflect the same type of User Dialog Box settings. 

Percentage

Now that we’ve reviewed the MACD let’s look at the Volume MACD I developed. The User Dialog Boxes are identical. As a result, the Value, Avg, & Diff lines are the same for each of these MACDs.

When a trader looks at volume, the values don’t reflect actionable information. Typical volume bars fail to offer actionable data. 

Even if we apply a label to calculate percentage values above or below the “normal” volume, this does not give us data useful enough to place a trade with any edge. 

Look at the picture below and understand how volume came before the price move, but not with an actionable signal.

Volume MACD Chart

This is why I decided to create a study measuring volume. When I decided to measure volume, I wanted a tool to show me momentum and trends.

With Volume MACD, we now have a tool to identify when volume momentum is increasing. This can signal when the trending volume has changed direction. Look below at the same price action, adding the Volume MACD study. 

Volume Before Price

Final Thoughts

Volume MACD gives us crossover signals that easily identify when volume momentum is increasing. This allows us to recognize a trending market before a move occurs.

I want to share some final thoughts. The MACD is a great study that can provide valuable and actionable stock market trading information across multiple time frames.

The Volume MACD can provide that same valuable data earlier than a regular MACD because volume changes come before price changes. However, learning to develop actionable trading strategies based on a new study is difficult.

This Volume MACD is different than anything I’ve ever used in trading. The early identification of volume changes comes much sooner than anything I’ve ever used.

Please make sure you take the time to become familiar with this study before placing trades based on the signals given. Our trading service is all about study and practice before diving in. 

ThinkorSwim link for the Volume MACD study: http://tos.mx/zlPnuE

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