Free lesson · Technical analysis

Volume, supply/demand zones and what OHLCV cannot reveal

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Start with the idea

Volume records traded quantity. It does not label all buyers as new demand or reveal every unfilled order.

Symbols, units & horizon

V_t: completed current volume in traded units
V̄_prior: positive matching historical volume baseline
RV_t: dimensionless relative volume
B: prespecified base-bar index set known before the confirming departure
Z: price interval from base lows/highs
L_i,H_i: base bar extremes

When and why to use this

Use activity and reproducible zone distances as context features. Use richer trade/book data for hypotheses about order flow.

Every executed trade has a buyer and a seller. Total volume alone cannot identify which side initiated it.
Relative volume compares activity with a permitted historical baseline. Match intraday seasonality, holidays and venue conventions.
Trade-level aggressor classifications, order-book changes and OHLCV are different data sources. Do not infer hidden institutional orders solely from a candle.
A supply/demand zone can be defined as a prior base followed by a specified displacement. Fix the base length, maximum range, departure threshold, expiry and retest rule.
Label the zone only after the departure confirms it. Do not backdate a trade to the base before the qualifying move existed.
A volume profile needs volume allocated to price bins. Daily OHLCV alone does not tell you how volume was distributed across those bins.
For zone testing, compare retests with matched ordinary levels and track failed or expired zones, not only successful reactions.

R V_{t} = \frac{V_{t}}{V_{p r i o r}}, Z = [\min_{i \in B} L_{i}, \max_{i \in B} H_{i}]

Specified chart rule · derivation and arithmetic

Volume, supply/demand zones and what OHLCV cannot reveal

Current volume 1,500 and prior baseline 1,000 give RV=1.5.
For base lows [99,100] and highs [101,102], the zone is [99,102].
Zone width=102−99=3 price units. Activate only after the separately specified departure rule confirms.

Work it by hand

A “1.5× volume” observation says activity exceeded that baseline by 50%. It does not say buyers outnumbered sellers by 50%.

Use the rule

Fix the definition, units and information timestamp.
Compute the example and inspect the graph.
Compare with a simple baseline on untouched periods after costs.

Before moving on

Write the exact rule, its availability time, an invalidation condition and a fair out-of-sample test.

Research context: review the related evidence checkpoint. The numerical convention here defines a candidate feature; that related research does not validate this exact rule.

Python implementation

Self-contained teaching example. Python 3.10+; dependencies and input conventions are shown in the code and notation. Run in your own Python environment.

def volume_zone(volume,prior_mean,lows,highs):
    if prior_mean<=0 or volume<0 or not lows or len(lows)!=len(highs) or any(l>h for l,h in zip(lows,highs)):
        raise ValueError("Valid base bars and volume baseline required")
    return volume/prior_mean,(min(lows),max(highs))

print(volume_zone(1500,1000,[99,100],[101,102]))

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