Volume Flow Indicator: Katsanos' Filtered OBV Update

Key Takeaways

• VFI uses the typical price instead of the close to decide whether a bar is bullish or bearish.
• A volatility cutoff zeroes out bars whose log-price change is too small to be meaningful.
• A volume cap limits the contribution of outlier volume spikes, keeping the series stable.
• The most common error is reading short VFI swings near zero as direction signals when filters are silencing them.

What It Is

The volume flow indicator VFI is a single-line oscillator plotted below price. Positive readings are interpreted as bullish flow, negative as bearish, and the zero line is the dividing point.

Katsanos designed VFI for daily charts of stocks and indexes. The default period is 130 bars, which makes it a long-memory tool more suited to position trading than scalping, though intraday parameter sets exist.

The Intuition

OBV adds or subtracts the entire bar's volume based on the close. That treats two very different bars identically: a tiny intraday wiggle and a strong directional move. It also treats a normal-volume bar and an earnings-day volume bar the same way.

Katsanos wanted three corrections. First, use the typical price so the direction signal is not held hostage by closing auction noise. Second, drop bars whose move is too small to count, using a log-volatility cutoff. Third, cap the volume contribution of any single bar so one earnings print does not dominate the series.

How It Works

The calculation runs in several steps. Start with the typical price:

TP = (High + Low + Close) / 3
Inter = Log(TP) - Log(Prior TP)

Compute a 30-bar standard deviation of Inter, then a price cutoff:

VInter = StdDev(Inter, 30)
Cutoff = Coef * VInter * Close

Coefficient defaults to 0.2 for daily charts and 0.1 for intraday 5 to 15 minute data. Build a volume cap from a moving average of volume:

VAve = SMA(Volume, period)[1]
VMax = VAve * VCoef
VC = min(Volume, VMax)

VCoef defaults to 2.5 daily and 3.5 intraday. The bar's signed contribution is then VC if the typical price moved more than the cutoff in the right direction, zero otherwise. Sum over the lookback and normalize:

VFI = Sum(signed VC, period) / VAve
VFI_smoothed = EMA(VFI, 3)

Default period is 130 daily, 26 weekly. The 3-period EMA cleans up the line for chart reading.

Worked Example

Take a stock with a typical price of 100, prior typical 99.5, and a Coef of 0.2. Log change is about +0.005. If the 30-bar standard deviation of log change is 0.012, cutoff equals 0.2 times 0.012 times 100, or 0.24. The actual price change of 0.5 exceeds 0.24, so the bar contributes.

If volume is 1.5M and the 30-bar volume average is 1.0M with VCoef of 2.5, the cap is 2.5M. Volume is below the cap, so the full 1.5M counts with a positive sign.

Now consider an earnings bar where volume jumps to 12M while VAve is still near 1.0M. The cap of 2.5M kicks in, so the bar contributes 2.5M rather than 12M. That single change is what stops a one-day event from dominating the next 130 bars of signal.

Common Mistakes

1. Mistaking filter silence for a flat market. When VFI hovers near zero, it can mean filters are dropping bars, not that flow is balanced.
2. Mixing daily and intraday parameter sets. Coef and VCoef differ by timeframe. Using daily defaults intraday produces an overly sensitive line.
3. Trading every zero-line cross. VFI works best for trend confirmation and divergence at swing extremes, not as a fast crossover system.
4. Ignoring the smoothing EMA. The raw VFI is jagged. The standard 3-period EMA is part of the published method.
5. Comparing absolute VFI across symbols. Although VFI is more stable than OBV, the scale still depends on each stock's average volume and volatility.

Frequently Asked Questions

What is the volume flow indicator VFI in simple terms? The volume flow indicator VFI tracks net buying or selling pressure by adding capped volume for bars where the typical price moves meaningfully up and subtracting it for bars that move down.

How does the volume flow indicator VFI affect investment decisions? Investors use VFI above zero as confirmation of an uptrend and below zero for a downtrend. Divergences between price and VFI at swing extremes are the classic warning signal.

What is a real-world example of the volume flow indicator VFI? On a daily chart of a steady uptrend, VFI typically stays above zero. When VFI crosses below zero on rising price, the divergence often precedes a multi-week correction.

How can investors use the volume flow indicator VFI effectively? Anchor it to the published parameters for your timeframe, watch zero-line crosses, and rely on divergence at price extremes. Treat filter-quiet sessions as inconclusive rather than bearish.

How is the volume flow indicator VFI different from On Balance Volume? OBV adds full bar volume on every up close and subtracts it on every down close. VFI uses typical price, a volatility cutoff, a volume cap, and a fixed lookback, so it filters noise and outliers that OBV ignores.

Sources

1. Katsanos, M. Volume Flow Indicator. Technical Analysis of Stocks and Commodities, June 2004. http://traders.com/Documentation/FEEDbk_docs/2004/07/Abstracts_new/Katsanos/katso.html
2. Markos Katsanos, Volume Flow (VFI) Indicator. https://mkatsanos.com/volume-flow-vfi-indicator/
3. Precision Trading Systems, Volume Flow Indicator usage. https://precisiontradingsystems.com/volume-flow.htm
4. ProRealCode, Volume Flow Indicator for ProRealTime. https://www.prorealcode.com/prorealtime-indicators/volume-flow-indicator/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.