Relative Volume: is anyone actually trading this?

What it measures

Relative volume divides the current bar’s volume by the average volume over a lookback. A reading of two means twice the usual participation; a reading of 0.4 means the move you are looking at is happening on almost nothing.

It is the simplest possible volume normalisation and it is the one that does the most work, because raw volume is not comparable between instruments or between times of day.

Most breakouts that fail, fail on low relative volume, which is why it belongs in a filter rather than in a signal.

It is also the cheapest possible sanity check on any other indicator. A divergence, a crossover or a squeeze release on relative volume below one is a pattern in data too thin to mean anything, and filtering those out removes a large fraction of false signals for almost no effort.

How it is calculated

These are the steps Basis performs, verified against the published definition.

1. 1

   Compute a simple average of volume over the lookback period.

2. 2

   Divide the current bar’s volume by that average.

3. 3

   A reading of one is an ordinary bar for this instrument; the number is a multiple, not a percentage.

Settings

Twenty periods is a reasonable default. Long lookbacks make the reading stable and slow to acknowledge a genuine regime change in participation; short ones make it react to a single quiet hour. On an intraday chart the lookback should ideally span whole sessions, or the average mixes active and dead hours.

How to read it

• Above two is unusual participation and worth looking at. Below one is a move happening without anyone.
• A breakout on relative volume below one is the classic false break.
• On crypto it has a strong time-of-day pattern, so a reading has to be understood against the session as well as against the average.
• It says nothing about direction. A relative volume of four is equally consistent with a breakout and with a capitulation.

Where it misleads

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