Volume Indicator Is Useless - PART 2

RVOL is useless for me.

Continuing the concept from the last blog, in this blog I am going to explain why RVOL as a concept is flawed and also understand how volumes in large cap and small cap are different.

First thing first let’s take a few examples of large cap and small cap stocks to understand the nature of the stocks. For large cap I am considering top names based on market cap and also remember anything that has FUTURE contract to it is large cap for me. This is just my consideration because anything that has a future contract that means those stocks have very high liquidity and mostly low ADR% (Which I don’t follow. Just to make you understand better).

Now let’s observe the size of the volume bars as a whole.

Here are few large caps,

Here are few small caps,

Comparing examples of both that is large cap and small cap stocks you should be able to tell that the volume on large caps is consistent that means no matter what that volume bars are in and around average volume if not all the time most of the time and hardly have big skyscraper volume bars unlike that you see in small caps. Even if there is a relatively big volume bar in a large cap there will be hardly any big move in the price unlike small caps in terms of percentage move. However, big skyscraper volume bars result in big price movement in price for small caps whereas this is not true for large caps.

Now, without this understanding, if you are comparing RVOL to make a trading decision, which stock to buy in live market hours does it make sense? For me personally who trade large and small caps stocks this does not make sense at all because large cap always will have less RVOL compared to small cap and it's misleading, so I don’t use this in first place instead I use RV relative volume that is today’s volume compared to yesterday’s vol. Because RV considers just yesterday's volume unlike RVOL where it takes the last 20 or 50 days average volume into consideration which is not at all significant as I have explained this in more detail in this blog. This is very similar to Volume * Price (VP) and Average Rupee Turnover (ART).

Summary,

• Most of the time if not always the absolute RVOL number will be big for small caps then large caps hence based on this making decision is nonsense.

• Do not expect skyscraper volume bars in large caps, unlike small caps. Even if it has big bars, the %change will be less; however, these things should be quantified based on the rupee move that is changing.

• Most of the guys I see get away using RVOL because they don't trade large caps in the first place.

• As the liquidity of the stock increases the RVOL behaviour changes. Considering RVOL to do it all for abnormal volume activity is a bad idea.

• I use RV instead of RVOL similar to VP instead of ART which I have explained in great detail in an earlier blog.

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