By Darrell Martin
Many charts employ volume up/down indicators. This type of indicator measures the volume of a bar. Apex Investing Institute has an indicator called Volume Accumulation Distribution or VAD. It measures the volume in a trend from point A to point B. It does not measure the volume of individual bars; rather, it measures the volume in a trend.
There are five different algorithms combining trend direction, price action, and order flow based on absorption, along with other technical details that go into the background makeup of the program. VAD enables you see the energy of the market. It helps you visualize when the steam might have run out of a trend. It makes you aware of divergence and exhaustion in the market.
As seen in the image above, the VAD, which appears towards the bottom, shows volume being higher on the second push up than it was on the first push up. By the time it made the third push up, it had only slightly higher volume before dropping to a pull back. The market gives another push up and VAD shows not as much volume. Then, there are a few more tries as the market attempts to push up to the previous highs. But check out the volume on VAD. It isn’t nearly as high, signaling that the market is running out of steam. The VAD indicator is very helpful to see the momentum in the market and to see then the trend is exhausted, running out of steam or building.
Think about running up a hill. You can run up the hill. You might even slow down a little or take a short break. After that break, a couple of things can happen. You might kick it in and run up the hill even faster than before. Or, you might just be plugging along and can’t quite make it up the hill. You feel exhausted. You have been going and going and you have run out of steam. This is what it looks like in the markets. The pullbacks could be the little break. Then the market could kick it and take off or it might be exhausted and not be able to make it up the hill.
Divergence and Convergence Price action going further on less volume is divergence. The market will have a lower low on price but not a lower low on volume. It can also be a higher high on less volume.
Divergence is market exhaustion.
When volume matches price action, it is convergence. The market has higher highs or lower lows with more volume.
VAD measures the volume in a trend. It can help you see divergence and convergence, giving you insight into what the market might potentially so. However, remember not to enter a trade based solely on what you see on VAD. It is not a system. It must be combined with other aspects of indicators or systems.