Chapter
7

Reprint from “Random Walks on Curved Surfaces”

Volume Stratification Analysis (or VSA) provides a logical method for the analysis and prediction of so-called “support and resistance” levels.  Many theories of Technical Analysis base themselves on the notion that past price or volume behavior on the part of a stock or commodity might have some influence upon future behavior.   The Volumetric Profile provides a well-defined and un-biased basis for the evaluation of these various theories. 

The Volumetric Profile is a Snapshot in Time

VSA keeps track of the cumulative volume in the various price ranges of a commodity or stock across its meaningful history.  After every transaction, an amount equal to the volume of the transaction augments the cumulative volume in the price interval of the transaction.  The “Volumetric Profile” is simply the list of the cumulative volumes within all of the various price levels of the historic transactions up to that point.

There are three steps in the creation of a Volumetric Profile.

1)     Establish the width of the price interval to be analyzed.

2)     For every transaction in history up to the time of interest, add the volume to the appropriate accumulator.

3)     Normalize the accumulated volumes so comparisons can be made between instants at different times.

 

How to Create the Profile from Transaction Records

To set the analysis parameters, such as the price interval, and the total number of accumulators, you will pre-survey the transaction list. to obtain it’s maximum price. The price interval width may be set down to the penny (or smallest unit) but larger features are best defined with larger intervals.

For the sake of example, we will assume a maximum price of $5, and we will set the price interval to a width of $1.  As a result, we establish 5 volume accumulators, one for each of the 5 possible price ranges.

 

 

·        Here are the first three transactions in our imaginary stock.

Transaction List	Shares Bought	Buying Price
First Sale	50,000	$3.75
Second Sale	25,000	$4.12
Third Sale	25,000	$2.50

·  Table. Initial Sales of imaginary stock issue.

 

 

·        After the first three transactions, the accumulators look like this:

 

 

 

·        Here are two more transactions

Transaction List	Shares Bought	Buying Price
Fourth Sale	10,000	$2.33
Fifth Sale	100,000	$3.25

 

 

 

·        After five transactions, the accumulators look like this:

 

 

Therefore, at every point in the history of an issue, we have a set of volume accumulators.  In order to be able to compare these accumulators from one time snapshot to another or from one stock or commodity to another, we must normalize the volume accumulator sums.

 

Normalizing the Profile

 

Several method of normalization are discussed near the end of this chapter.  However, for comparisons over fixed price ranges, ( say, from 1 to 100 dollars) it is sufficient to take the amount in each accumulator as percentage of the total volume.

 

·        In this case, the total volume is 210,000 shares, hence:

 

 

Once you normalize the accumulator list,  it can be readily compared with profiles from other periods.  Sometimes you will see profiles with each accumulator set to be a percentage of the volume of the accumulator with the highest volume.  Such a profile is easier to chart but for computational purposes it is equivalent.

 

 

The term “volumetric” implies measurement of the whole.  Strictly speaking a “Volumetric Profile” must be based on the entire meaningful history of the issue.  The Volumetric Profile can be defined to be a normalized cumulative volume distribution that is accumulated over the entire meaningful life of the issue.

 

 

 

 

 

 

Copyright 1999 by Phil McLaughlin

Reprinted from Random Walks on Curved Surfaces