The appearance of significant volume surges indicates that a large number of contracts are changing hands. As a rule, these volume surges reflect a change in market sentiment. They frequently precede at least a short-term price reversal.

Our SBV (Selling-Buying Volume) indicator helps you to define critical levels at which a trend reversal is most likely to occur. During a specified period, the SBV indicator calculates the difference between the volume production during a price (index) advance ("Buying volume") and the volume that is generated as the price (index) moves lower ("Selling volume"). By applying this indicator to our modulated combined volume charts, we make it more precise and easier to use. Modulated volume charts allow users to analyze and compare SBV indicators during an entire session, noting those volume surges that are not part of typical diurnal variations.

Chart 1: S&P 500 Selling & Buying Volume accumulation during up- and down-trend

The SBV indicator reflects the magnitude and duration of "Selling surges" (which occur as the price / index moves down) and "Buying surges" (which are created as the price / index moves up). For instance, when the SBV indicator hits levels exceeding +33%, it reveals that the Buying volume has exceeded the Selling volume by more than 33% (the SBV indicator will be green). The opposite is true when the SBV indicator drops below a level of -33% (in this case, the SBV indicator will be red). In this particular example, the Selling volume would exceed the Buying volume by more than 33%.

A very simple trading system can be built using the SBV indicator:

Sell on Buying surges and buy on Selling surges.

Keeping their personal trading styles in mind, traders can set their own critical SBV levels, which serve as triggers to initiate and close trades.

Research using historical SBV data shows that a trading system based on the SBV indicator delivers much better returns when trading decisions are not triggered by the index simply reaching the actual critical SBV threshold, but by reaching it, trading beyond it, and then retracing back to that level.

More to read:

A Simple Trading System

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