Bar Ratio provides insight into the market's supply and demand conditions by evaluating the volume traded at the extremes of each price bar and determining whether buying or selling are reaching exhaustion or trades hitting the bid or lifting ask are being absorbed by a big buyer or seller . For maximum insight, the indicator is used in Numeric display mode, typically with Numbers Bars. We have also provided a Compact display mode suitable for use on bar and candlestick charts and two conditional modes: Conditional Numeric which only displays significant high and low ratios; Conditional Text which provides an incredibly clear indication of market conditions in plain English.
High Ratios: Exhaustion – a lack of supply or demand
When we have a Ratio that is above the Exhaustion Ratio setting, it is a strong indication that buying demand has reduced at the top of an up move and that selling supply has reduced at the bottom of a down move. The only reason prices move is because of supply and demand traded volume. If we have a lack of supply or demand from high volume traders then there is no power in the market for the previous move to continue so a pause or reversal becomes likely.
Our Single Print at Extreme indicator works well in conjunction with Ratio Display to highlight when the last buyer has bought or the last seller has sold.
Low Ratios: Absorption – the presence of strong supply or demand
When we have a Ratio that is below the Absorption Ratio setting, it is a strong indication that high volume traders are either building or liquidating a position. This high volume may be sufficient to pause or reverse the direction that price has been moving in. To consider this in very simple terms, in any market which has rising prices, the presence of a seller with a massive amount of inventory will cause prices to stop rising or even fall as other sellers try to compete with the large seller. Likewise, in a market with falling prices, the presence of a buyer willing to purchase a large amount of inventory at prices they regard as low will cause prices to rise in line with the increased demand.
We see this situation through high volume at the extreme of the price bar combined with a Ratio that is below the Ratio Bounds Low.
In some cases, the high volume will be sufficient for the bar's Point Of Control (POC) to occur at this price. By combining Ratio Display with our POC at Extreme indicator, we can see clearly when high volume traders have traded sufficient volume within the market to cause a price move to stop or change direction.
Both high and low ratios may indicate a pause or a reversal of a prior move but it can be seen that different trading contexts apply from high and low ratios. It is the breaching of the Exhaustion and Absorption Ratio values that holds significance rather than the absolute value of the ratio. The Bar Ratio default values have been found to yield good trading results but you may find that the specific markets you trade have their own volume characteristics which are suited to alternative Exhaustion and Absorption Ratio values.
Bar Ratio may be licensed for Sierra Chart on a Lifetime, 1-month or 3-month basis, or as part of the complete Emoji Trading Order Flow Suite. Licences include all indicator updates and enhancements during the license period.