An article by Ken Calhoun in the February 2018 issue of Technical Analysis of STOCKS & COMMODITIES touts the advantage of using volume to confirm price action momentum before making a trade.  According to Calhoun, “By seeking to trade with the help of correlated technical analysis patterns, you gain a trading edge over less knowledgeable retail traders.”

That got me to thinking about building trading systems based on volume indicators alone.  Since the Trader makes it easy to experiment, I started with some volume indicators I had previously included in predictions along with indicators from the price momentum category.

For the volume experiment, I built a prediction with Volume indicators such as On Balance Volume,  Money Flow Index, and Positive and Negative Money Flow Index.  After testing several combinations on a basket of Forex pairs, I had generally successful models, but they didn’t trade as often as I would have liked.

Next I started to audition indicators based on a visual assessment of whether an indicator added different patterns for a neural net to learn.  I graphed a number of indicators from the Volume category on the chart and eliminated those that were similar.  I used the “different” indicators as inputs to another prediction, and the overall result was that I had created successful models, but still they didn’t trade as frequently as I preferred.

However, during the process of graphing indicators, I took a closer look at the Positive and Negative Volume Index indicators.  Checking out the indicator help file, I learned that the Negative Volume Index indicator provides a measure of market direction relative to price level for periods of declining volume. Both of these indicators are based on the theory that the buying and selling of smart investors occurs on quiet, declining volume days, while the buying and selling of unsophisticated investors occurs on dramatic, increasing volume days. Using this theory, the Negative Volume Index should indicate the actions of the smart investors.
The next step involved the creation of an indicator that looked at divergence between these two indicators.  I simply subtracted the Positive Volume Index from Negative Volume Index, and then used that value to create trading rules such as:

Trading Rules

I also used a Fixed Size position size of 100,000 units of each currency in the portfolio.