Consolidation Value Zones (Recio) Consolidation Value Zones introduces an original algorithm to identify consolidation ranges and locate areas of importance within them. This new method "looks" at the chart and draws zones based on price with the goal of producing actionable zones which appear natural, as if they were found through a human analysis.
> Consider the following...
The chart image above displays Bitcoin, at no specific date, for no specific reason. What I have done here is simply glanced at the chart for about 5 seconds, and circled a few areas which stood out as "obvious" consolidation. It does not take a savant to look at a chart and circle ranging price. However, what we have just done defies many common systems for identifying consolidation. We have located ranges of various zone lengths, as small as roughly 25 bars to as large as roughly 100 bars. Regardless of this, we still determined these zones with our eyes and brain in a few seconds, for some it's practically instant. The issue with us humans doing this, is that we are subjective. We did not really use any concrete rules to determine these areas with our eyes. So the problem becomes "How do we identify these zones in a way which seems natural to us with a repeatable system?" Because of this, my approach is simply a logical attempt to reverse engineer our human intuition.
> Consolidation Value Zones
The name of this indicator is generic. To dissect it, we are identifying consolidation ranges, then using a volume profile to determine the value zone within that range. The specific method used to identify these consolidation zones is something I've personally been referring to as the "skewer" method. Another name that may fit better is "Linear Range Alignment/Overlap".
Ultimately, the goal is to locate a single price level or range that overlaps many adjacent bars.
This should, in theory, return areas of visually obvious consolidation.
> The Skewer Method (Identification Method & Bar Gap Allowances)
One consistent concept across the different identification methods for determining consolidation is time. How long do we chop around before calling it consolidation? This is the "Identification Threshold". Once we have located a consolidation zone "this" wide, we will then consider it as consolidation.
In the chart image above, we are considering a six-bar consolidation formation. The figure on the left shows an example of a perfect raw bar overlap, we can see that the six bars all overlap at one price range. This is a perfect example of what we are looking to identify as consolidation. Unfortunately, if this was all we looked at, we would have a very scarce identification method.
For that reason, we have the example on the right, which shows the additional allowances for the identification of these ranges. At most, the example on the right shows a gapless three-bar overlap. However, if we allow the identification to bridge across the gaps, we are able to draw a zone directly through the center and still be within our parameters. This allowance is the "Bar Gap Allowance" and will determine the leniency of the identification.
Between our identification threshold and bar gap allowance, we can start to piece together how the script is "looking" at our chart.
> Detecting Consolidation (Live Detection)
To aid in transparency and user understanding, the live detection calculation can be seen on the chart as a box, skewering the recent historical bars with a number next to it, indicating the number of bars found as potential consolidation.
As we can see in the chart image above, the script, by default, is looking for a 15-bar consolidation, with a 5-bar gap allowance. In the image, the specific gap count is labeled, we can see the script scan backwards as far as it can before counting five gaps in the data. Once that occurs, the detection stops.
Notice how the zone found is a range, consisting of all price levels which meet the parameters. The lower level of the range only had two gaps, but the upper level reached five.
> Consolidation Range and Value Zones (Volume Profiles)
Once the script has identified the consolidation formation, it calculates a volume profile across the identified consolidation range. From this it calculates and draws the Point of Control (POC) and Value Area in addition to the full consolidation range.
Once we have our zones drawn, and understand what they identify, we can go one step further and apply concepts from volume profile trading.
Range High/Low: Displays the current extent of the identified consolidation.
Value High/Low: Shows the specific area within the consolidation where buyers and sellers found the most value.
POC: The single point, where the most volume was transacted during consolidation.
In a balanced market, we would anticipate price to rotate around POC, oscillating from Value High (VAH) to Value Low (VAL). In contrast, a market in motion moves directionally, building volume at new price levels as value, naturally the POC shifts with it.
> Zone Extensions
Unlike many other scripts, there is no mitigation logic at play here, since crossing a zone simply tells us "buyers and sellers are not currently active here", but it does not guarantee that value cannot return or react from previous areas of value.
Obviously the current zone will always be most relevant, but historical zones can retain relevance depending on the context of the market.
Remember: Each area of consolidation is an area where buyers and sellers were once facing off, resulting in price's consolidation. Amidst this, the value zone was the area of greatest agreement between the participants at that time. When moving outside of a range, we would typically look at historical value areas and price's interaction with them for further context.
Due to the ever changing market, there is no fixed extension lookback that will cover every scenario. By default, the Extension Lookback is "1", meaning the script will extend the most recent zone forward until a new zone is detected.
Note: For clarity, zone extensions are colored differently from core zones.
The following chart image shows a few examples of these unique interactions.
As seen in the chart image, looking to previous areas of value as well as POC can provide context in the form of acceptance or rejection at these levels, providing further insight into the auction for us to respond to.
The zones do contain logic to maintain a clean display. By default, the zones extend conditionally when price returns to the previous consolidation range. If desired, the zones can be extended regardless of price action; this can be toggled with the option "Regardless Extension Mode", as seen below.
> Hollow Candles & Zone Merging
When consolidation is identified, a hollow candle is drawn; these can be used to see exactly when each zone is identified. It is important to understand that consolidation zones stemming from the same origin are merged into one zone. This is a frequent occurrence when the consolidation threshold is passed, but the consolidation continues. For this reason you will often see multiple hollow candles in the later areas of the zones.
Similarly, zones from different origin points that overlap are also merged into one consolidation zone. This ensures that no core zones overlap.
Additionally, every time a zone is merged, a new volume profile for the area is calculated.
> Bar Gap Allowance Type (Technical Explanation)
The specific bar gap allowance value can be altered, but so can the type of allowance being used. While some analyses may benefit from counting the total amount of bar gaps within the consolidation, others may benefit from detecting based on consecutive bar gaps.
The chart image above displays the gap counts for each gap allowance type.
The total bar gap allowance type will count until the gap amount is reached, then terminate detection once the allowed number of gaps has been exceeded.
The consecutive bar gap allowance type resets its count once it finds a valid bar within range, by doing so, it only counts the bars that separate each island of in-range bars.
Both methods have merit.
> Implementation
This identification method has proven effective to identify consolidation across market types. As a result, there cannot be one configuration of settings to fit every application. Adapting the detection type and method for each trader's specific market conditions is highly recommended.
When determining parameters, it is helpful to consider time, as it plays a major role in the identification method.
On a 1D chart, the default threshold of 15 corresponds to 15 days, or about 3 weeks depending on the ticker. To identify periods of one-week consolidation, a threshold of 5 would be suitable. To detect perfect gapless weeks, a bar gap allowance of 0 could be used, as seen in the chart image below.
Additional Example:
In the chart image above, we see a 15-second forex chart over the span of a few hours. The detection parameters are set up to detect 15-minute consolidation with a 2-minute max dead zone (consecutive bar gap).
> Detection Source
By default, the script detects consolidation ranges using the full extent of candle wicks. While this is traditional, detection can also be done using only the candle bodies. These identifications are much more nuanced, detecting only from confirmed candle price action; they do not trigger at the same frequency as wick detection.
Optionally, a "Wick/Body Average" can be chosen as the source for detection; as the name implies, this uses the average value between the candle body and its respective wick.
> Additional Settings
The settings mentioned thus far serve as core parameters for identifying consolidation. The following parameters are simply included for the benefit of the advanced user. It is not recommended to adjust these settings under normal circumstances.
- Value Area Percent: Default = 68.26, while traditionally 70 for volume profiles, 68.26 is accurate to the values of a standard bell-curve distribution. The differences are minimal in application.
- VP Rows: Default = 99, Sets the number of rows to be used when calculating the Volume Profiles (VP); note that higher values will lead to a slower calculation. Max value: 999
> Final Notes
If you have made it this far, thank you for reading.
I hope you find value in this new consolidation identification system and understand the logic behind it.
That's it. VWAP Deviation Profile (Recio) This indicator offers a new form of VWAP analysis and Volume Profile analysis, revealing price levels of high and low volume activity relative to VWAP on a periodic basis.
The VWAP Deviation Profile (VDP) is an original concept for analyzing price levels relative to VWAP. This indicator introduces a new way to analyze volume accumulation over a session and implements a novel method for ranking and categorizing volume nodes, allowing the indicator to display a full history of volume node development and progression.
Author Note: To those familiar, this concept is an extension of the "VWAP Balance Zones" (VBZ) concept. No prior knowledge of VBZ is required to understand this indicator, but it provides a good background for the formation of this idea. If this is your first time here, the next section will briefly fill you in.
> VWAP Balance Zones
"VWAP Balance Zones" is another original concept aimed at identifying the equilibrium (balance) area between market participants within the current trend by averaging the daily extremes and the daily VWAP. The idea was that the 50% area between daily extremes and daily VWAP could appeal to both buyers and sellers, thereby creating points of contention where we can watch for opportunities.
This methodology opened the door to the idea of analyzing price action relative to VWAP within the range of the day. In the first implementation of this concept, the VBZ indicator created zones which were exactly 50% between VWAP and the daily high and low. This indicator moves beyond the 50% level and analyzes all of price action relative to VWAP to determine the percentage levels where most volume actually occurred.
> A New Profile
The VWAP Deviation Profile uses relative price positioning in order to aggregate its profile. Instead of reading straight price levels, each point on the profile is relative to VWAP and the day's extremes. This creates a dynamic profile that transforms over time. Its values shift as time progresses due to the developing daily range and its two-scale system.
Unlike a typical volume profile, the VWAP Deviation Profile operates on two separate scales: from VWAP to the Day High, and from VWAP to the Day Low. When new highs or lows are made, the entire profile must adjust accordingly. For this reason, the density of the profile differs over and under VWAP, since price action is not typically symmetrical around VWAP.
Due to the nature of this analysis, some concepts from typical volume profile are considered relevant but others are thrown out entirely. The following sections describe the parts of the profile and how they differ from a typical volume profile.
>> Range & Rows
The range of the VWAP deviation profile is the same as a traditional volume profile. The profile displays horizontal rows spanning the entire price range. Unlike a normal volume profile, each VDP row represents a one-percent deviation from VWAP to the relative extreme. The session high represents a +100% deviation, while the session low represents a -100% deviation. VWAP is 0% deviation, since this is the value we are measuring deviations from.
>> Volume Nodes
Volume nodes are the peaks and valleys in a volume profile representing areas of high volume and low volume relative to the surrounding areas of volume. This indicator uses a new algorithm for identifying these points, different from my previous node detection algorithms. This new method is significantly more efficient, which creates opportunities for additional analysis of these points.
Reading volume nodes in this indicator is similar to a typical volume profile. However, it is important to remember that all row values are percentage deviation values from VWAP.
High Volume Nodes: These are areas where significant volume has occurred, often due to spending a lot of time at these levels. With VWAP deviations in mind, these high volume areas show us exactly which deviations of VWAP have been interacted with the most over time. High volume areas can be considered contested areas, with sellers finding value above and buyers finding value below. This dynamic creates chop and consolidation which results in increased time spent at these areas.
Low Volume Nodes: These are VWAP deviations where price has spent the least amount of time (and little volume). These low volume areas display the negative space between high volume areas. Low volume areas are often transitory, with bounces occurring on the edges or strong continuation through.
>> NO POC
In a volume profile, the Point of Control (POC) is the single row in the profile where the most volume occurred. VDP implements "Ranked Volume Nodes", which identifies and orders all volume nodes from highest to lowest and vice versa, up to 10 ranks of nodes of each type (HVN/LVN).
A single row on the profile still contains the most accumulated volume. However, to avoid confusion, the term "POC" is avoided here since this point does not represent the same information as a traditional volume profile analysis.
>> NO Value Area
In a volume profile, Value Area is typically the area surrounding the POC which contains 70% of the profile's total volume, representing the area where most transactions occurred. This does not exist in VDP.
This is replaced with a metric I've called the "Volume Split".
The Volume Split is the profile row at which 50% of the profile's total volume has occurred above and 50% has occurred below. This point can serve as a bias gauge and an indication of market state. A Split around VWAP suggests a better balanced market, while a disproportionate Split shows a clear imbalance. In addition to general bias, due to the underlying nature of this metric, activity is often witnessed around the Split level consistent with other levels of importance.
This concludes the comparison between VDP and a traditional VP.
> Historical Node Analysis
Due to the improved node detection algorithm, VDP is able to display a full history of Volume Nodes and Split Values, allowing users to study the behaviors and interactions of this indicator historically.
Volume nodes and Split values are displayed as plots, which live in the chart history permanently. At the end of each day, an end-of-day (EOD) profile is drawn into history as well.
Since the profile changes as it develops over time, the nodes are constantly shifting. For example, a place where an LVN has formed does not remain an LVN if price starts interacting with it, this point will naturally shift or disappear.
> Historical Update Frequency
For additional efficiency, the script implements a historical update frequency, which only calculates historical values at the selected interval. This speeds up calculations and does not affect the accuracy of the live profile. The historical update frequency can be set all the way down to 1, to produce a full calculation, perfectly replicating the calculations as if they were live. This comes at the expense of slower processing times. By default the historical update frequency is set to 10, this provides a good balance of responsiveness and accurate information.
This behavior ONLY affects historically calculated data. When watching a live chart, the live values are calculated and solidified in history as the chart develops. These live-calculated values remain on the chart until the chart refreshes.
Below is a comparison between the default frequency of 10 bars and the highest-granularity setting of 1 bar.
> Ranking Nodes
After volume nodes are detected, they are ranked from highest to lowest, or lowest to highest depending on settings. This creates the ability to study up to 10 ranks of nodes on the profile in any order.
Volume nodes are not ranked based on volume alone, but the surrounding volume structure is taken into account. For this reason some nodes may appear as if the order is wrong. This is an intentional behavior to give priority to nodes with more "mass" surrounding them.
In the chart below, the nodes are set to show the 3 highest HVNs. So 1 should be the highest volume, and 3 should be the lowest. However, we see an outlier situation where the 2nd-ranked HVN appears to contain less volume than the 3rd-ranked HVN. Due to the surrounding mass of the volume structures, the 2nd is regarded as more important than the 3rd, since the mass of the surrounding area is greater overall.
> Adaptive Thinking
At the beginning of the day, the profile starts with only one bar of data. As the day progresses so does the profile; the extremes develop and so does VWAP. What was 100% then is not 100% now, and the 0% baseline (VWAP) has changed in value.
Due to this, it can be confusing to figure out how the profile is determining its values and where the data is coming from on the chart.
"Traces" were made to help understand this dynamic by visualizing the profile's row values throughout time. These traces point to the exact price interactions which led to the present data.
In the chart below, the Highest HVN, Lowest LVN, and Volume Split are traced back to the start of the session.
IMPORTANT NOTE: Visualizing traces this way will only help in understanding how the profile works. Traces being used in this manner present a look-ahead bias. They will appear artificially "good" due to the future information known by the user when setting the trace levels at the current node values.
After looking at this, we can see that the highest volume deviation of the day was created from breakouts and expansion of the daily high. Additionally, we can see the areas where price crossed our lowest volume deviation, with little time (and volume) spent chopping through it.
One way to implement traces into a live analysis is by marking the percent deviations from the previous day and tracking them into the current session. Traces do not change based on volume and stay at a fixed deviation percent.
> Settings
Anchor Timeframe:
The VWAP/Profile anchor timeframe can be changed to any custom timeframe to suit your needs. By default the anchor profile is set to "1 day" so the terms "Day" and "Daily" used thus far in the description can be understood as referring to the custom timeframe, session, or period you choose.
Below is a chart showing a 1-Week anchored profile.
Node Sensitivity:
The node sensitivity setting can be tuned to match the desired level of nodes that get identified. A lower sensitivity will identify nodes more conservatively, only pointing out nodes which are more pronounced. A higher sensitivity will identify nodes more aggressively, often pointing out smaller less-pronounced nodes in addition to the obvious nodes.
This setting can be tuned from 1 to 10. The default is 7, which was the preferred setting during development. More or less sensitivity may be needed based on your market and application.
Increasing the sensitivity does not compromise the integrity of the identification for larger nodes, it only (as the name suggests) increases the sensitivity to minor fluctuations in the topography of the profile.
In the chart below, we have set the nodes to display their max number of ranks (up to 10 nodes). When sensitivity is at 1, only 2 HVNs are identified. When set to 7 (default), 5 HVNs were identified from the same profile.
Other Node Settings:
Node Display Number: Choose the MAX number of nodes that can be displayed at one time. The specific number displayed is dependent on the number of nodes detected. If the display number is set to 10, but only 2 nodes are detected, only 2 nodes will display.
Node Order: Set the ranking order of the displayed nodes. Choose to display the highest or lowest of each node type. Want to see the 2 Lowest HVNs? Go ahead!
The chart below shows the 3 lowest HVNs and 3 highest LVNs.
Display Settings:
The profile's location can be configured relative to the current bar on your chart through two settings.
Display Size: This sets the max width of the profile. The row with the highest volume will be this many bars wide. This setting can be negative to display the profile as left-facing. To distinguish historical profiles from live, the inverse of this value is used for casting historical profiles.
Display Offset: This changes the axis bar, 0 = current live bar. This value can be set to negative values to move the axis left, or positive values to move the axis right.
Manual Traces:
Up to 4 traces can be set, these values can be set anywhere from -100 to +100. These are aligned with the profile's deviation percentages with -100 being the Day Low, 0 being VWAP, and +100 being the Day High.
To find the percentage value of a point on the profile, hover over the labels at the end of the profile rows to get a readout of the exact percent deviation they represent.
Runtime Modifications:
Historical Update Frequency: As touched on in its own section, this changes the frequency at which the historically calculated indicator values are updated. The default 10 has been found as sufficiently detailed and quick, yet the value can be decreased for higher detail or increased for higher speed.
Live Profile Only: If desired, all historical visuals can be turned off, leaving only the live profile on your display. This offers a minimalist display, while retaining all indicator levels.
> Application
The goal of this indicator is to offer a new means of analysis. This analysis may be most helpful to traders who study Auction Market Theory, or are familiar with VWAP and volume profiles. The analysis is not locked to a specific market or timeframe, although you will be limited based on the anchor timeframe selected.
Here are a few special behaviors which were observed during development:
Trend:
On days where price is trending, the entire profile skews to one side. This is due to the disproportionate amount of volume which occurred (for most of the day) on one side of VWAP with relatively little volume on the opposite side.
In the example below, the morning reversal turned into trend which flattened out later in the day. For most of the day, VWAP was essentially playing catch-up, while the Volume Split tracked at a more relevant level.
Volume Accumulation in Trend:
In an uptrend, volume accumulation is witnessed at various percent levels just under the Day High. In the chart example above, the session's trend caused an HVN to develop at 94%.
While price is breaking the highs, every candle does not sit perfectly at the daily high for the entire trend. Between the candle highs and lows as well as fluctuations, accumulation is witnessed just below the highs. The area between the high and the closest HVN is revealing for how tight the trend is, where to expect retracements and when to suspect reversals.
Node Relevance:
Volume nodes formed earlier in the session often retain relevance when revisited later in the session.
The example below shows multiple interactions with HVNs and LVNs throughout the day which were established far in advance, giving ample opportunity to anticipate interactions later on.
Volume Distribution:
VWAP tells us (as its name implies) the price level average relative to volume. However, VDP tracks how volume accumulated at price deviations above and below VWAP.
In the chart example above, price spent about double the amount of time above VWAP vs below VWAP, yet due to the volume figures and price deviations from VWAP, the Split ended the day only at +22%.
From the price action and time spent above VWAP, we could assume a bullish bias with more continuation. However, when looking at the Volume Split, we notice that it is still relatively close to VWAP, telling us that volume has not significantly accumulated at higher deviations away from VWAP. With this in mind a more cautious approach may be better.
The chart below shows the following day from the previous example and illustrates why a more cautious approach may have been appropriate.
> Final Notes
Thank you for reading!
Because this is a new form of analysis, there is not one "correct" way to implement it, as it is still in its infancy. We are only able to take concepts from other established methods and use what we know to shape our understanding and interpretation of this new indicator. The goal of my examples is to demonstrate the behaviors of this indicator and hopefully spark ideas on how it could be utilized in your own trading systems.
That's it.
