The Volume Accumulation indicator combines volume and a price-weighting that shows the strength of conviction behind a trend; the Volume Accumulation indicator is a helpful tool in uncovering divergences. The formula for the Volume Accumulation formula is shown below:
- Volume x [Close - (High + Low)/2]
The formula only gives positive volume to the day if the close is higher than the midpoint of the high and low. If the close is towards the lower half of the range of the price action, then volume is negative for the day. A chart compares the Volume Accumulation indicator with the On Balance Volume indicator that adds positive volume if the close is higher than the previous close, even if the close is only a penny higher, is given next of the stock Citigroup (C):
As can be seen in the chart above, Volume Accumulation was giving a more realistic representation of what the stock of Citigroup was doing - going downward. The logic behind the Volume Accumulation technical analysis indicator is follows:
- An up day on high volume is considered bullish, because volume is being transacted at higher prices; for example, there is an imbalance of supply and demand, demand is more than supply, therefore price increases. The fact that there is much volume shows that the size of the supply and demand imbalance is large.
- A down day on high volume is considered bearish, because volume is being transacted at lower prices. With an imbalance of supply and demand, there being more supply than demand, then prices will go down. Since their is high volume, this is a bearish signal because there were many more stock traders and investors trying to get out of their position and willing to do that by asking a lesser price.
An important use of the Volume Accumulation indicator is to confirm price movements and show divergences between the indicator and prices, signaling a potential reversal in trend. This is discussed on the next page.
