What is withholding tax?

Chartists only ever use price and volume data when searching for patterns and bar charts can prove very useful at flagging periods of exceptional volumes or price volatility. These periods of enhanced activity can give invaluable insights into the shifting balance between buyers and sellers.

They are often defined by the combination of high volumes and muted price action or low volumes and volatile prices. The former suggests a strongly held but divergent view in the market as to the likely direction of a trend. Therefore heavy trading occurs by both bulls and bears but price moves are hard won and so small.

In contrast high intraday price volatility accompanied by relatively low turnover can occur because one group of traders is largely absent. This may presage the market embarking on a significant move. Alternatively a wide price spread on low volume can be seen as indicating climactic exhaustion and potentially creating a price void that will cause a trend to rotate.

When prices are volatile and volumes are muted it is important to look at the price action preceding the relevant bar to determine whether the action flags the start of a new significant move or trend rotation. Exceptional bars do not occur that frequently and can be flagged using colour on a chart.

A price-based alternative to inspecting each bar’s range and volume has been suggested by two Swiss foreign exchange managers, Etienne Botes and Douglas Siepman. Building on the idea behind Welles Wilder’s popular DMI system, they have focused on looking at the differences between a bar’s high and the next bar’s low (the basis of the negative Vortex value) and the difference between a bar’s low and the next bar’s high (the basis for the positive Vortex value). By smoothing this raw data and dividing it by the average true range over the same number of bars, two lines can be drawn which indicate the relative strength of each force in the market, i.e. the bulls and the bears.

Unlike the DMI system, Siepman and Botes’ approach considers all net moves both positive and negative in an attempt to give early trend indication while minimising false signals. Interpretation is simple with the higher line indicating the trend and crosses of the lines flagging a trend change. The suggested trading approach is to instigate positions not on the close but only when the extreme of the bar on which the crossing of the two Vortex lines occurs is breached, i.e. the bar high seen if +VI crosses up through -VI and vice versa.

Chartist SABmiller chart

This price chart shows SAB Miller (SAB) with two narrow range/high volume bars coloured in red and more numerous wide range/low volume bars in green. The former indicates where there is highly active and divergent opinion about the merits of the shares, a critical condition that can occur at turning points. The latter shows either easy movement as a result of one sided opinion or climactic exhaustion that presages a consolidation or trend rotation.

Chartist Dow Jones Industrial

Here is a chart of the Dow Jones with the 14-period Vortex indices below. Signals are given when the two lines cross, buys when the blue VI+ rises above the red VI- and vice versa. Using a subsequent price break of the relevant price extreme achieved on the signal helps reduce false triggers and the addition of an ATR trailing stop (mauve stepped line) helps capture more of each move while limiting exposure to adverse moves.



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