The Relative Volume (RVOL) indicator is a technical analysis tool used to compare the volume of stocks traded during a given time period with the average volume traded over a larger time period.
The RVOL indicator is useful across all time ranges and is used by both long-term and short-term traders.
Looking at daily volume provides supplemental information that is often not noticeable from simply examining price action.
Volume indicators like the RVOL offer valuable insights into the momentum of a stock’s price and the direction and strength of price trends.
The RVOL can be supplemented with additional volume indicators, such as the Accumulation/Distribution Line Indicator, or with other trend and momentum indicators.
Key Takeaways
- The Relative Volume (RVOL) indicator compares the current trading volume with average trading volumes.
- Volume information is generally used to confirm trend direction and strength, but it can also be used to find entry and exit points for trades.
A Breakdown of Relative Volume
RVOL is a very simple measure that compares current and historical volumes traded.
The time period setting can be any value, from minutes to days or even weeks.
The average comparison value is then a Simple Moving Average (SMA) or Exponential Moving Average (EMA) of past volumes, usually over the last 50 periods.
The RVOL histogram shows each period’s volume relative to the average.
- A green bar represents a larger relative volume (a value between 1 and infinity).
- A red bar represents a smaller relative volume (a value between 0 and 1).
- No bar represents the current volume being the same as the historical average volume (a value of 1).
How to Calculate Relative Volume
The RVOL is calculated using a simple formula.
RVOL = Current Volume / Average Volume
The average volume is a SMA or EMA over the desired lookback period, typically 50 periods.
Average Volume = SMA/EMA (50-periods)
How to Use Relative Volume
The RVOL is useful because it offers a simple representation of a stock’s trading volume with a high degree of information for the trader.
Instead of needing to look at absolute value volume bars to discern a pattern, the necessary information is presented simply and clearly as a relative value in the histogram.
- The larger the bar, the bigger the difference between the current and average volume.
- The smaller the bar, the less the difference between the current and average volume.
Traders then have a simple visual cue for examining trends and finding exploitable entry and exit points for trades.
Price action with little volume is generally considered irrelevant, while price action with large volume is considered significant.
That said, very short-term traders, such as day traders, can also use the RVOL to exploit periods of low relative volume where the stock price is moving dramatically with few outside catalysts.
Trend Confirmation
The most common use for the RVOL is in trend confirmation and determining the strength of these trends.
Prices can make significant movements based on very small trading volumes, which are often quickly reversed when trading volumes turn back closer to the average.
By examining the relative trading volumes driving price action, traders can confirm the strength and direction of current trends on the price chart.
- A low relative trading volume infers a weak trend or false signal.
- A high relative trading value infers a strong trend or a true signal
While trend confirmation itself does not generally create the opportunity for trades, RVOL trend analysis can be used in conjunction with other technical indicators to make actual trades.
Breakouts
RVOL can be used to identify breakouts from range-bound price levels before they happen.
Prices can move between support levels and resistance levels on low trading volumes for an extended period of time.
However, when relative trading volumes increase, there is a good chance that this will quickly lead to a breakout either above or below the current trading range.
The rate of relative volume change can also provide information as to the strength of the breakout, but other technical analysis indicators should be used to confirm the direction of the breakout.
The Best Tools for Using Relative Volume
The RVOL is a valuable tool that is best used in coordination with a number of additional indicators.
Traders need market research tools that allow them to compare and contrast various technical indicators as well as move between various modes of analysis, such as price charts and volume charts.
Our top recommendations for market research tools for retail traders are:
Executing complex trading strategies that rely on indicators such as the RVOL requires advanced trading platforms that offer complex analysis and trade execution tools.
Our top recommendation for advanced trading platforms for retail traders is:
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