Volume divergence is a powerful yet nuanced tool for traders, especially when it comes to spotting possible trend reversals or continuations. Here’s a quick rundown of the pros and cons to keep in mind:
$VOLD Divergence Indicator for ThinkorSwim
Here is an indicator that shows divergences between $VOLD and $SPY. A divergence happen when the price disagree with an indicator or an index. In this case, it's the $VOLD index. VOLD is the difference between the up volume and down volume on the NYSE.
How to trade:
I put this indicator together so that I can quickly check for divergences all in one chart.
This method is just one way of utilizing the market internals to trade. I heard some people also use $ADD and $TICK. Here's a quick overview of Market Internals.
Pros:
- Early Warning Signals: Volume divergence often acts as an early alert to shifts in market sentiment. For example, if price rises but volume decreases, it can signal a weakening trend.
- Improves Accuracy: Used alongside technical indicators like moving averages or support and resistance levels, volume divergence helps validate trend strength and spot entry or exit points.
- Insight into Market Sentiment: By watching volume trends relative to price movements, traders gain a window into the confidence or hesitation of other market participants, which can be highly valuable in predicting price behavior.
Cons:
- Not Always Reliable: Volume divergence isn’t foolproof and can sometimes produce false signals, leading traders to anticipate a reversal or continuation that doesn’t materialize.
- Requires Context: Volume divergence works best in the context of other indicators. Without additional confirmation, it’s easy to misinterpret volume signals, especially in choppy or low-volume markets.
- Complex for Beginners: Interpreting volume divergence accurately can take time and practice, making it challenging for new traders who may still be mastering technical analysis basics.
$VOLD Divergence Indicator for ThinkorSwim
Here is an indicator that shows divergences between $VOLD and $SPY. A divergence happen when the price disagree with an indicator or an index. In this case, it's the $VOLD index. VOLD is the difference between the up volume and down volume on the NYSE.
How to trade:
- When the price of SPY is going up while $VOLD is heading lower, we have a bearish divergence = short
- When the price of SPY is going down while $VOLD is heading higher, we have a bullish divergence = long
I put this indicator together so that I can quickly check for divergences all in one chart.
thinkScript Code
Code:
# VOLD and SPY Divergences
# Assembled by BenTen at useThinkScript.com
# Discussion https://usethinkscript.com/threads/vold-divergence-indicator-for-thinkorswim.715/
declare lower;
input symbol_1 = "SPY";
def IsUp = close > open;
def IsDown = close < open;
def U = close("$UVOL");
def D = close("$DVOL");
def UDL = U - D;
plot volume;
def volume_confirm = UDL > UDL[5];
def volume_confirm2 = UDL > UDL[5];
volume.SetPaintingStrategy(paintingStrategy.SQUARED_HISTOGRAM);
volume.assignValueColor(if volume_confirm then Color.green else Color.red);
if (GetUnderlyingSymbol() == symbol_1)
{
volume = UDL;
}
else
{
volume = double.nan;
}
AddLabel(yes,"SPY Only", color.white);
assignPriceColor(if volume_confirm then color.green else color.red);Here's how it works:
The direction of the candles is based on $SPY. The color of the candles is based on $VOLD. If you see SPY moving down, but the candles remains green, then there is a possible bullish divergence. Same goes for when SPY is moving up, but the candles are red, there is a potential bearish divergence.This method is just one way of utilizing the market internals to trade. I heard some people also use $ADD and $TICK. Here's a quick overview of Market Internals.
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