How to set the volume ratio VR? Short-term overbought and oversold values

VR measures volume change over time, helping traders spot trends; combine with RSI for better trading decisions in volatile crypto markets.

Jun 09, 2025 at 03:08 pm

Understanding Volume Ratio (VR)

Volume Ratio (VR), also known as Volume Rate of Change, is a technical indicator that measures the rate of change in trading volume over a specific period. It is used by traders to identify potential trends and reversals in the market. The VR can help traders understand whether a price movement is backed by significant trading volume, which can be an indicator of the strength or weakness of that move.

In the cryptocurrency market, where volatility is high and trends can shift rapidly, understanding and setting the VR can be crucial for making informed trading decisions. The VR is calculated by taking the ratio of the current volume to the volume from a previous period, typically over a set number of days.

Setting the Volume Ratio (VR)

To set the Volume Ratio (VR), you need to follow a few steps to ensure that it aligns with your trading strategy and the specific cryptocurrency you are trading. Here's how to do it:

• Choose the Time Frame: Decide on the time frame over which you want to measure the VR. Common time frames are 10, 20, or 30 days, but this can be adjusted based on your trading style. Shorter time frames can help identify short-term trends, while longer time frames may be more useful for longer-term trend analysis.

• Calculate the VR: The formula for VR is relatively simple. It is the current period's volume divided by the volume of a previous period. For example, if you are using a 10-day VR, you would divide today's volume by the volume from 10 days ago. The formula is:

  [
  VR = \frac{\text{Current Volume}}{\text{Volume from N days ago}}
  ]

• Set the Threshold: Determine the threshold levels for VR that you will use to make trading decisions. A VR above 1 indicates an increase in volume, which can signal strong bullish momentum. Conversely, a VR below 1 can indicate a decrease in volume, suggesting bearish momentum.

• Integrate into Trading Platform: Most trading platforms and charting software allow you to add custom indicators. You will need to input the VR formula into your platform and set the time frame you decided on. Once set, the VR will be displayed on your chart, allowing you to monitor it in real-time.

Short-term Overbought and Oversold Values

Short-term overbought and oversold values are crucial for traders looking to capitalize on quick market movements. These values are typically derived from technical indicators such as the Relative Strength Index (RSI) or the Stochastic Oscillator. In the context of VR, understanding how volume interacts with these indicators can provide additional insights into market conditions.

• RSI: The RSI is a momentum oscillator that measures the speed and change of price movements. It is typically set to a 14-day period and ranges from 0 to 100. An RSI above 70 is considered overbought, while an RSI below 30 is considered oversold. When combined with VR, a high RSI and a VR above 1 can indicate a strong bullish trend, while a low RSI and a VR below 1 can signal a bearish trend.

• Stochastic Oscillator: The Stochastic Oscillator compares a closing price of a cryptocurrency to its price range over a certain period. The default setting is usually 14 periods, with readings above 80 indicating overbought conditions and readings below 20 indicating oversold conditions. Similar to RSI, combining the Stochastic Oscillator with VR can provide a more comprehensive view of market conditions.

Using VR with Short-term Indicators

To effectively use VR with short-term indicators, you need to understand how these indicators interact and what signals they provide. Here's how you can combine VR with RSI or the Stochastic Oscillator:

• Identify Overbought/Oversold Levels: Use RSI or the Stochastic Oscillator to identify when a cryptocurrency is overbought or oversold. For example, if the RSI is above 70, the asset is considered overbought.

• Check the VR: Once you've identified an overbought or oversold condition, check the VR to see if the volume supports the price movement. A high VR (above 1) during an overbought condition can indicate strong bullish momentum, while a low VR (below 1) during an oversold condition can indicate strong bearish momentum.

• Make Trading Decisions: Based on the combined signals from the VR and the short-term indicator, you can make more informed trading decisions. For example, if the RSI is overbought and the VR is high, it might be a good time to consider taking profits or entering a short position. Conversely, if the RSI is oversold and the VR is low, it might be a good time to consider buying.

Practical Example of VR and RSI

Let's walk through a practical example of how to use VR and RSI together to make trading decisions in the cryptocurrency market.

• Scenario: You are monitoring Bitcoin (BTC) and notice that the RSI has moved above 70, indicating overbought conditions.

• Step 1: Check the VR for Bitcoin over a 10-day period. You find that the VR is 1.2, indicating an increase in volume.

• Step 2: Analyze the combined signals. The high RSI and high VR suggest strong bullish momentum, but since the RSI is in overbought territory, it might be a good time to consider taking profits.

• Step 3: Based on this analysis, you decide to sell a portion of your Bitcoin holdings to lock in profits, while keeping an eye on the market for potential reversals.

Monitoring VR and Short-term Indicators

To effectively monitor VR and short-term indicators, you need to set up your trading platform to display these metrics clearly. Here's how you can do it:

• Add VR to Your Chart: Most trading platforms allow you to add custom indicators. Input the VR formula and set the time frame you want to use. The VR will then be displayed on your chart, allowing you to monitor it in real-time.

• Add RSI or Stochastic Oscillator: Similarly, add the RSI or Stochastic Oscillator to your chart. Set the standard parameters (e.g., 14 periods for RSI) and ensure that the overbought and oversold levels are clearly marked.

• Monitor Both Indicators: Keep an eye on both the VR and the short-term indicator. Look for divergences or confirmations between the two. For example, if the RSI is overbought and the VR is high, it might confirm a strong bullish trend. If the RSI is overbought but the VR is low, it might indicate a potential reversal.

• Set Alerts: Many trading platforms allow you to set alerts for specific indicator levels. Set alerts for when the RSI reaches overbought or oversold levels and when the VR crosses above or below 1. This can help you stay informed without having to constantly monitor the market.

Frequently Asked Questions

Q1: Can VR be used as a standalone indicator for trading decisions?

A1: While VR can provide valuable insights into volume trends, it is generally more effective when used in conjunction with other indicators such as RSI or the Stochastic Oscillator. Using VR alone may not provide a complete picture of market conditions, and combining it with other indicators can help confirm trading signals.

Q2: How often should I adjust the VR time frame?

A2: The frequency of adjusting the VR time frame depends on your trading strategy and the specific cryptocurrency you are trading. If you are a short-term trader, you might adjust the VR time frame more frequently to capture short-term trends. For longer-term trading, you might stick with a longer time frame and adjust it less often.

Q3: What are the risks of relying on short-term overbought and oversold values?

A3: One of the main risks of relying on short-term overbought and oversold values is the potential for false signals. In highly volatile markets like cryptocurrency, an asset can remain overbought or oversold for extended periods, leading to premature trading decisions. It's important to use these values in conjunction with other indicators and to consider the broader market context.

Q4: How can I backtest VR and short-term indicators for a specific cryptocurrency?

A4: To backtest VR and short-term indicators, you can use historical data from your trading platform or a third-party service. Import the data into a backtesting software or platform, set up the VR and the short-term indicator (e.g., RSI) with your chosen parameters, and run the backtest over a specific period. Analyze the results to see how well the combination of indicators would have performed in past market conditions.