ValuePickr Forum

Price-Volume Action for screening and early warning indication strategy

Today I am going to discuss about slightly different perspective which we as an investor usually don’t practice or shy away with.

This is on - Price Volume action and how it helps us to make better decisions around screening and as early warning indicator for our investing decisions - whether buy, add or sell.

First of all, the question arises in the mind of investor is that - if there is so much of fundamental information available out there in terms of books, research reports, conference calls, industry reports etc., then why do we need to do hard work to understand all this??

The answer to this will unfold slowly as we delve into this subject.

The Context
Now, let’s put our thinking hats ON and think that what happens on a normal day in the stock market? Of course - we all know that >> buying and selling of securities.

Further digging deeper, each transaction leaves it’s footprints and there are decisions from investor/trader/speculator that has caused that transaction. And for every transaction there are two things - quantity and price at which the transaction has happened.

This tells us that PRICE and VOLUME are two fundamental building blocks of all the transactions that happen on the stock market. And most importantly they leave footprint of transactions of all market participants and indirectly their behavior and decision points.

Interesting point is all the technical indicators are second order derivative of these to basic building blocks with certain mathematical formula applied around it, you name any of it - RSI, Moving Averages, ADX etc.

So, it gives tremendous advantage logically, if we are able to capture price-volume action first hand and are able to infer actions of market participants to an extent. It can work like very early warning indicator. Hence, we should never ignore price-volume action.

Application and Uses:
Obviously, the question comes to our mind is that how to capture these footprints, how to apply these and how to make best use of it.

Well, it depends upon our own creativity and depth of fundamental implications of various actions and we can back-calculate such parameters from price-volume action to our advantage.

Let me give few simple examples:
(a) We know that there are price-volume breakouts when there is some fundamental news about the company comes out and excites the market participants - say capex announcement, above expected results, any sort of approvals, new product announcement, tax sops for sector etc. Infact most of the times these things happen even before news is out

Simple way you can capture these mathematically is by putting screens like - Today price increase >4% price increase of avg last few days/weeks; Similarly for volume

(b) Say there are sector news which moves all the sector participants due to positive happenings in the sector.

You can capture these by building screens mapped by sector to see such price fluctuations.

What I have Done?
To share my journey, I have been blending technical analysis (including price volume action) and fundamental analysis for investing purpose - what I call TechnoFunda Investing

These are steps which I use, and you can feel free to modify as it suites your style of investing.

  • First level early warning indicator using price-volume action
  • Second level technical analysis indicator based filter
  • Third level fundamental screening to filter further
  • Fundamental study and research
  • Position sizing based on risk management
  • Finally exit signals based partly on early warning indicator
  • And final exit based on technical indicators and fundamental news

How I have built my screen?
I have built my own screen to capture price action and below are some pointers on process flow. Again, rather than using any tool, I wanted my own fundamental thesis to be back calculated using mathematical formula on price-volume.

Steps:

  • Have time series data of price, volume, no. of trades using bhav copy (available on BSE, NSE) for FREE
  • Averaging price-volume data based on time periods I want to compare (say weekly/monthly averages)
  • Mapping sectors/sub-sectors and 52 week high data
  • Applying customized screens for final screening

I have different screens to calculate what I want to finally see on charts (just converted into math):

  • Breakouts from big consolidation range
  • Breakouts with new highs
  • Volume shakeouts
  • Sectoral trends etc.

I then track it based on time series to see patterns and thereby it also helps to find long term trends.

Below is a small example of sector level final confirmation screen which I posted few years back on my twitter (again to show how powerful these are):

Happy to answer if you have any questions.

Disclaimer:
All the examples shared above are for knowledge sharing purpose only. Please consult your advisor before taking any investment decisions on examples or these strategies. These require hard work and indepth understanding of the approach.

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@ vivek_mashrani, Thank you very much for the topic. Could please share the formula you are getting the final time series from volume and price time series. Thank you

Jaman,

I use simple data of closing price and volume of shares traded from BSE and NSE (bhavcopy data). After this I arrange it column-wise for each date. I like to keep things simple :slight_smile:

2 Likes

Thank you @vivek_mashrani for sharing the details about your price action strategy.
How your screener differs from the existing tools like chartink.com by which we can apply the math related formulas on the price and volume action to shortlist the stocks.

Jilani,

The magic is one layer after screening. That is - sector, sub-sector and now in my current version Capitalisation (small, mid, large as per MF norms)

You can see on the screenshot that I have posted on initial thread that by applying such mapping I was able to even catch sector level price-volume action.

Hope that clarifies your point.

2 Likes

can you elaborate what indicators and moving average combination used in your screener

Bhaskar,

This is the purest form of screening…just on price and volume. I am not using any indicators here at first level of screening. Hope that clarifies.

All indicators based filters are at later stage for ranking the ideas. I use multiple indicators based on portfolio allocation strategy I use. Below are some:

Moving Averages
Parabolic SAR
Donchian Channels
ADX
RSI
Volume Profiles

2 Likes

Money flow index little better than RSI

there is something like VCP where volume dries up just before good break out

RSI, MFI used to follow volumes mainly

Hi @vivek_mashrani ,
Just trying to understand the process you mentioned ,are you filtering based on a certain criteria like
Price increase >4% and Today’s volume/weekly or monthly average volume >3 and updating the excel on a daily basis? I can see you have multiple entries with 1 and 0 in excel,what is the criteria for this value to be set to 1 as this price volume action may not be very common and every day you might be having completely different set of 20-30 stocks satisfying this criteria.

I can understand your formula In case of screening 52 week high stocks as this will mostly be similar set of stocks/sectors- could you please help me understand your process for Price Volume? Also I believe most of the stocks would be uncommon ,Do you research on all 20-30 companies in your screen on a daily basis to check if there is some news/event?

Thanks,
AB

Anindya,

Yes, some of the criteria are similar to what you mentioned in terms of % price increase and volume increase but there is more to it. Again, would not be able to share exact criteria due to proprietary nature of the tool.

On 0 or 1 appearing for screened stocks, the whole idea is to find recurring trend. So, that is the pattern I am looking for. Something which appears frequently rather than 1 or 2 days. Remember, this process is designed for long term investing an not intra-day trading.

Below is the process flow, I don’t research all the companies appearing on screen, that is first level early warning indicator…after that all below steps follow:

You can learn about end-to-end process from this video: https://youtu.be/umkUDnHjXM4

Ofcourse, have refined and fine-tuned my process during last 2 years after that.

3 Likes

I have created something similar to what Vivek has done based on google finance functionality. I rank T/O (turnover = price*volume) breakout based on cumulative 1 week T/O as a % of cumulative 12 months T/O.

Volume Breakout NSE500.xlsx (294.0 KB)

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