Weighted Average Volume Depth [QuantraSystems]

26 Feb 2024

Weighted Average Volume Depth

Introduction
The Weighted Average Volume Depth (𝓦𝓐𝓥𝓓) indicator is calibrated to provide extensive insights, calculated using volumetric price action and volume depth, and provides dynamic adjustments based upon historical volatility.

This indicator is a valuable asset for traders and investors, aiming to capture trends, measure dynamic volatility, and provide market reversion analysis in a systematic way.



Legend

Volumetric Top Cap: Plotted at y = 0, this line represents the probabilistic maximum value, or ‘cap’ for the signal line. It is colored using a binary color scheme, and indicates the dominant trend direction - green for an uptrend and purple for a downtrend.

Base Line: Calculated using a volume-weighted volatility measurement, this line is used as the benchmark to calculate momentum in the 𝓦𝓐𝓥𝓓 indicator.

Signal Line: The signal line represents the volume and volatility weighted measurements, and oscillates between the Base Line and Top Cap. Its position between these levels provides the depth of insights available in this script.
When the signal line is remaining in close proximity to the base line, this is indicative of a low volatility market environment. These periods are also reflected as muted bar coloring when the ‘Trend Intensity’ setting is enabled.
Conversely, when the signal line approaches, or even breaks above the Top Cap, this is characteristic of an unsustainable trending action - and probabilistically speaking, a reversion or consolation is likely to occur at these levels.

Highlighting: When this setting is enabled, background coloring is applied when the Signal Line breaks above the Top Cap. This highlights green as an oversold zone, and purple as an overbought zone.

Reversal Signals: When price begins to reverse from a zone of overextension, a signal is plotted when this reversion occurs from a high probability zone.

• Circle - Shows a possible bullish reversal.
  
• Cross - Shows a possible bearish reversal.
  

Case Study
In the above image, we showcase three distinct trades in short succession, showcasing the 𝓦𝓐𝓥𝓓’s speed and accuracy under the right conditions.

• The first long trade was initiated upon receiving a bullish reversal signal. The trade was then closed after the price experienced a sharp upwards movement - and an overbought signal was indicated by the purple shading.
  
• The second, short trade was entered on the next bar, after a bearish reversal signal was printed by the indicator (a white cross). Similarly, this trade was closed upon the oversold signal.
  
• Once again, a reversal signal was indicated by the 𝓦𝓐𝓥𝓓 indicator. This time a bullish signal (a white circle), and hence a long position was opened. However, this trade was held until a negative trend confirmation (signaled by the Top Cap’s shift in color). This makes apparent the indicator’s flexible nature, and showcases the multiple signaling types available for traders to use.
  

Recommended Settings
The optimal settings for the 𝓦𝓐𝓥𝓓 indicator will vary upon the chosen asset’s average level volatility, as well as the timeframe it is applied to.

Due to increased volatility levels on lower timeframes, it is recommended to increase the 'Top Cap Multiplier' to take into account the increased frequency of false signals found in these trading environments. The same can be said when used on highly volatile assets - a trader will likely benefit from using a higher 'Top Cap Multiplier.'

On more price-stable assets, as well as any asset on higher timeframes, there is merit to tightening the length of the 'Top Cap Multiplier,' due to the slower nature of price action.


Methodology
The 𝓦𝓐𝓥𝓓 starts with calculating the volume weighted average price and the volume weighted variance - which is the expectation of the squared deviation of a variable from its mean, giving insights into the distribution of trading volume.

Using the volume weighted variance, a standard deviation value is calculated based on user input. This value acts as the ‘Volumetric Top Cap’ - seen in the 𝓦𝓐𝓥𝓓 indicator window as the zero line.

The signal line is calculated as the difference between the current price and the theoretical upper or lower VWAP deviation bands. This line acts as the trigger for identifying prevailing trends and high probability reversal points.

The base line serves as a reference point for historical momentum. It is calculated using an exponential moving average of the lowest signal line values over a defined lookback period. This baseline helps in assessing whether the current momentum is high or low relative to historical norms.


Notes

• Bar coloring can be turned off - especially useful when stacking multiple indicators as recommended, or set to 'Trend Intensity,' or 'Binary Trend' (which reflects the top cap coloring).
  
• It is always recommended to never rely on a single indicator - and instead build and test multiple strategies utilizing more than one indicator as confirmation.

14 Mac 2024

Nota Keluaran

Added 'Dynamic' capabilities.
Added 'Compressed Signal Mode'.

6 Jun 2024

Nota Keluaran

Fixed alert bug

15 Okt 2024

Nota Keluaran

• Cleaned up input menu for more uniform structure.
  
• Added signal table.