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Warrior Trading Blog

Volume Rate of Change (VROC) Indicator Definition: Day Trading Terminology

Volume Rate of Change

What is the volume rate of change? The volume rate of change, or VROC, is a technical indicator used to measure the rate of change in the trade volume of a security.

Volume is an important component of virtually every trading strategy based on technical analysis, and is a key indicator for many strategies. Therefore, since the volume rate of change is among the most critical volume indicators, this makes VROC an essential indicator used in many technical analysis trading strategies.

The Importance of Volume

Volume is the measure of all shares traded, bought and sold, over a given period of time.

Volume analysis is an essential complement to price analysis because many changes in price are driven or shaped by the trading volume at the time of the price changes.

For example, many breakouts from key moving average indicators, such as a death cross, are accompanied by a high trading volume, as the transition through this key technical point drives many traders to adjust their positions simultaneously.

If a death cross, or other similar price-based indicator, is not accompanied by a sudden surge in trading volume, then this indicates that a breakout in price is unlikely to follow.

By contrast, periods of low trade volume can also lead to dramatic price changes, as even small trade orders can shift the price substantially as they fill.

Therefore, many trading strategies use one or more volume indicators as a complement to price indicators, usually to confirm or deny a trading decision produced through price analysis.

The Volume Rate of Change Indicator

Volume Rate of Change

The volume rate of change indicator is produced by comparing the change in volume over a specified period to the volume from some specified previous trading session.

For example, if the volume today was 3 and the volume 5 days ago was 2, then the VROC over the 5 day period would be 50%: (3-2)/2.

Taken as a line, the volume rate of change is a daily moving indicator that shows how the rate of the volume traded has been increasing or decreasing over time. 

While the simple volume indicator will show large changes in trade volumes, the volume rate of change indicator is a measure of trading volatility showing increases and decreases in the momentum of trade volumes.

Trading with the Volume Rate of Change Indicator  

Just as with any technical indicator, the interpretation of the volume rate of change is subjective and different for each trader.

The first issue with using the volume rate of change indicator to trade is to determine the number of periods to use for calculating the VROC. Most traders prefer either the 10 day or 20 day volume rate of change, as this represents the window for most price action where volumes are relevant to day trading strategies.

Most trading strategies use the volume rate of change indicator as either a form of confirmation or denial of a trade determined by analyzing price indicators. Generally traders are looking for indicators and patterns that are supported by high and/or increasing trade volumes, as this signals that the price action is driven by conscious market action, as opposed to just the background ‘noise’ of market prices.

The volume rate of change indicator is used so often in such a wide variety of different trading strategies that it is a technical indicator that all traders should have a familiarity with. While there are many trading strategies that do not employ the VROC indicator, or use some alternative volume indicators, it so generally useful that it can always add value to any analysis.

Even traders who rely on fundamental analysis to determine their trades will often employ the volume rate of change indicator when entering and exiting their long term positions, as they attempt to find the best price for their trade and avoid slippage.

Final Thoughts

The volume rate of change, or VROC, indicator is one of the most widely used technical indicators for measuring trade volume. The focus on volatility offers traders a sense of the market’s current momentum and activity, which is more than a trader can get from a simple daily volume bar chart.

The VROC indicator is most often used as a means of confirming or denying trades that were originally developed using analysis of price action, making the volume rate of change indicator one of the most widely used complementary indicators in technical analysis for day trading and investing.