A Complete Guide to Volume Price Analysis Part 7

• • • Duke Energy stayed at this price level price of $65.75 for several days, before finally breaking above the resistance area, and then moved steadily higher on steady volumes. Finally, the move runs out of steam, and volume as always tells the story. Right at the end of this trend we have three ultra-high-volume bars, beneath narrow spread candles. Is the market strong or weak? And the answer of course is weak, and we see the price fall sharply. But once again, the selling volumes are average, so clearly not a major turning point for Duke Energy which continued higher and remains bullish, for the time being. At time of writing Duke Energy is trading at $74.41. • • • • • • • I now want to consider different markets and time frames and the first example is the SLV which is an ETF (Exchange Traded Fund) for silver. ETFs are a very popular way for many traders to enter the commodity markets, and the SLV is certainly one of the most popular. It is a straightforward ETF, un-leveraged and is backed by the physical metal. Here we have the 5-min chart, so perfect for an intraday, scalping strategy. As we can see from the chart, starting at the far left the SLV had been moving sideways, albeit with a bullish tone before starting to fall, breaking below the interim platform of support with 5 consecutive down candles, on rising volume. A signal that the price action was being validated by volume, which at this point is above average. The SLV then drifts sideways for a few bars before we see two narrow spread down candles, the first with above average volume, an anomaly, and the second with extremely high volume. This must be stopping volume and therefore buying, otherwise the candle would be wide. Instead it is narrow. This is followed by the hammer candle, on high volume, signaling more buying in the market. The response is muted with the up candle, which moves higher on low volume, not a sign of strength, but is followed on the next candle with rising volume and a wide spread candle, so an encouraging signal. The insiders then test on low volume, and move higher on solid volume, before weakness starts to appear with a wide spread up candle and a subsequent failure at the same level. What happened next was that SLV then drifted along at this level for some time, before selling off again the following day. In this example we are looking at this opportunity as a scalping trader. However, if you were an aggressive trader, then you may well have taken a position based on the hammer alone. After all, this looks like a strong signal. However, the following candle suggests weakness at this level. The volume is well below average, and at this point we would be wondering if this was a wise decision. Any stop loss by the way would be below the wick of the hammer, with the market setting this level for us. Assuming we continue to hold, the next candle is much more encouraging, a wide spread up candle with high volume, so a good sign. No reason to exit just yet. The next candle suggests weakness, a shooting star (although not at the top of a trend, weakness nevertheless with the deep upper wick) and above average volume. We are • • • • • • expecting a reversal on the next bar, when in fact we see a positive signal – a low volume test which is followed by a wide spread up candle with above average volume once more, with a further pause before the final leg to the top of the move. At this point a more cautious trader would have seen the initial response to the hammer, and taken this as a sign of weakness, which it is, and decided, based on this signal to stay out of the market for the time being, and perhaps waited for the second candle, which IS a sign of strength, before entering a position. If so, in this case, this would probably have ended as a small profit, a small loss, or perhaps break even. Before starting, let me put the gold market into context for you. At the time of this chart, gold had been weak for some time, and in a low inflation environment with higher returns in risk markets, money flow in general at this point was away from safe havens. The longerterm trend for gold was therefore bearish. This is the context against which to view this intraday price action. The market opens gapped down on extremely high volume, a clear signal of weakness. We are starting with weakness which has been validated by volume. The next candle forms, a small hammer, again with ultra-high volume. Is this stopping volume – perhaps, and we wait for the next candle to form, a small candle with an upper wick, suggestive of further weakness, and coupled with high volume. Clearly not a positive response to the 'stopping' volume. The next two down candles suggest a modicum of buying on each, with the lower wicks showing some support, but the market continues lower on rising volume with the penultimate candle suggesting stopping volume once again. Finally, the last down candle in this price waterfall closes on average volume, followed by the first up candle of the session. A weak response if ever there was one, with a deep upper wick and narrow spread with above average volume. This is hardly a market that is preparing to reverse at this point. The next candle is perfectly valid, a narrow spread up candle with average volume – this looks fine. Then we see a repeat of the first candle in this sequence of up candles, but this time, look at the volume – it is extremely high. This is sending a LOUD signal that the market is VERY • • • • • WEAK. If this were buying volume then the market would be rising fast – it isn't, so it must be selling volume. Everyone is selling and trying to get out of the market before it collapses, with every attempt to rise knocked back by the pressure of selling. The next candle is even worse, sending an even stronger signal, if any were needed, that everyone is selling and the market is now incredibly weak. Here we have ultra-high volume and a market that is going nowhere. The price spread is narrow, and if the volume were buying, then the market would have risen. The insiders are propping the market up, selling stock accumulated in the price waterfall, before taking it lower. The next two candles give no clues, narrow spreads with low volume, then the market sells off sharply, as expected, and validated with ultra-high volume, as it lurches lower once again. The next candle hints at stopping volume once again with a narrow spread and deep wick on very high volume. The buyers are moving in at this level, and this is repeated on the next candle with high volume again on a narrow spread. Now we should see the market recover, but look at the next candle. The market attempts to rise, but falls back to close near the open on above average volume. Not a strong signal. A small hammer follows, on ultrahigh volume so perhaps there are more buyers in the market, and based on the volume of the last few bars, perhaps a reversal is now in prospect? Three bullish candles then follow, each with a narrow spread, but the volume is flat, so we have a market rising on flat volume, and therefore unlikely to go very far. The market reverses from this level, and as it falls volumes are increasing signaling selling pressure once again. The final candle in this sequence is a very narrow spread doji candle, with high volume, and again we can assume that this is stopping volume with buyers coming in once more. This is confirmed with the next candle which is a wide spread up candle with above average volume, but as the market rises on the next two candles, volume is falling away. The insiders are not taking this market far. The market then drifts sideways for an extended period in the session with several attempts to rally all failing, and with volumes generally falling to low levels throughout this phase the market duly closes, looking very weak. • • • • • • • • • Whilst the open was bad news for those traders bullish on gold, even worse was to follow, and candles five, six and seven were accompanied with volume which can only be described as extreme. Trading volumes on each candle were more than 6 million, with average volumes around 500,000. In other words, panic selling. Even the hammer candle and the associated volume was not sufficient to slow the market momentum and the solitary wide spread up candle on high volume, failed to follow through, with the market moving into a congestion phase before rising volumes on the four down candles at the end of the sequence signaled yet more bearish pressure and heavy selling. The currency pair had been rising nicely for a little while, volumes were average (as marked with the dotted white line) with no anomalies or signs of weakness at this stage. Then suddenly we see the blue candle form, with a wide body but also with an equally deep wick above. We are now paying attention as with this volume bar, the pair should have risen strongly, and clearly in the volume bar there is a large amount of selling, confirmed by the deep wick to the top of the candle. The pair manage to move higher for a couple of bars, but the warning has been flagged and sure enough five bars later we see a shooting star candle with high volume. The next candle is also weak, a narrow spread doji candle with high volume. A potential reversal awaits! The next candle confirms the weakness, another shooting star candle this time with higher volume still. And what is also important here, a lower high than the previous candle. This is the time and place to take a short position with a stop loss above the level of the wick of the first candle. The pair sell off and duly start to move lower, and one aspect that I want to highlight here is how volume helps you to stay in a strong position and hold it to maximize your profits from the trend. As we all know, markets never move in a straight line, they move lower, then pull back a little, before then moving lower again. Here we can see this in action perfectly illustrated, and the point I want to make is this. Four bars after the second shooting star, we have a wide spread down candle, and we are delighted. Our analysis has been proved correct, and we are now in a strong position. Then the market begins to reverse against us. Is this a trend reversal, or merely a pause in the move lower? • • • • Well, the first candle appears. The spread is relatively narrow and the volume is above average, so this is an encouraging sign. In addition, we have not seen any evidence of stopping volume with narrowing spreads and rising volume, so this looks like a pause point. The next candle confirms this as does the third, and on the completion of this last candle we can see that we have a market attempting to rise on falling volume, and we know what that means! Equally, if you are long the market the same applies. In an uptrend the market will pull back against you. If the volume is falling on these pull backs then you KNOW this is simply a minor reversal lower and not a change in trend, particularly if you have seen no topping out volume. Finally, as we can see on the right-hand side of the chart, stopping volume finally appeared, with the market moving into a congestion phase with the selling pressure dropping away to below average. The pair completed this phase of its journey and we exit. Our entry, our management, and exit of this position have all been executed using one simple tool. VPA. Nothing else. Why more traders, speculators and investors don't pay attention to volume is beyond me, but there we are. • • • • • • • • • • The reason I’ve chosen the weekly chart for the AUD/USD is that not only is it a good example of a selling climax, it also gives us a perspective on how long this may last. As I have said several times in this book, we must be patient. Major changes in trend take time to come into effect, and this is an example. It also shows that VPA works in all time frames. Remember, here we are looking at a period of around 18 months, so long term trends with big profits to be made if you are patient, and believe in the power of VPA of course! As we can see from the chart the AUD/USD pair has been bullish, before moving into a congestion phase on average volume. Then we see our first anomaly. A narrow spread up candle with very high volume. The pair are struggling at this price point and the market is not responding. The next weekly candle arrives with ultra-high volume, and if this pair were going to sell off sharply, then we would expect this to be a wide spread down candle – it isn't. It's a narrow spread. The buyers must be supporting the market at this level. The next candle arrives, a hammer with a deep wick, and this confirms the previous candle. This is buying, and now we wait for any further signals, which arrive on the next candle, a low volume test on a smaller hammer candle. The high volume selling that we were seeing in the previous candle, which was absorbed by the buyers, has now dissipated and the forex market makers are ready to take this pair higher. And off it goes at a nice steady pace, marching higher on nice steady volume. The move higher extends over several months, but the point to note here, is the slow steady fall in volume over this period. It's not dramatic, just a steady fall, and then as we enter the yellow box on the chart – what do we see? Two wide bars, one after the other, but look at the volume. It has fallen away to almost nothing. This is a HUGE warning signal that this pair is becoming exhausted, and either running out of steam, or there is some alternative explanation. What is clear, is that the market makers are moving prices higher with NO volume, and have withdrawn from the market. Traders who have missed this long trend higher, are now jumping in on fear and greed. They fear missing out on a golden opportunity. After all, they have watched this market go up and up, and have finally caved in and bought, just when the market makers are leaving by the side door. Then the selling climax begins. The market makers are selling in huge volumes at this level, before finally after several weeks the pair break lower, and attempts to rally giving us signs of further weakness, before breaking lower again. Note the attempt to rally at the right-hand edge of the chart. Here we see narrow spread up candles on very high volume, and falling, another very strong signal of further weakness to come, which duly arrives. One point I do want to cover here in a little more detail is the whole issue of rising and falling volumes when associated with trends, because we do have to apply some flexibility to any analysis and interpretation here. After all, if the market moved higher for ten consecutive bars, and you wanted to apply the volume principle to the letter of the law, then you would have to see 10 volume bars each higher than the last. Clearly this would place a limit on how far any trend could go, since it is unreasonable to expect volumes to go up and up and up forever! The above example is a case in point. The first few candles on the up move are supported by good volume, which is up and down, but above, or just around, average. This is fine. After all, there are always going to be variations particularly when you begin to look at the longerterm timescales. There may be seasonal effects, days when the markets are thinly traded during holidays, and of course days when the markets close. This rarely happens in forex, but it does happen in other markets and affects the forex markets accordingly. Please be a little flexible in your approach when judging volume in trends, and allow a little bit of latitude in your analysis. Here we were waiting for an anomaly, and until the two low volume candles arrived, there was nothing to signal that any change in trend was imminent. • • • I now want to consider the opposite, namely a buying climax and once again we have a nice example on the AUD/USD weekly chart in Fig 10.18 below. On this chart, we are looking at an eighteen-month period approximately, and we can see that the pair has topped out and rolled over into a nice price waterfall, all confirmed with nicely rising selling volumes, validating the move lower. Then a hammer candle arrives and we need to assess whether there is sufficient stopping volume? The next candle gives us the answer with a small shooting star on high volume. • • • Clearly the market is NOT ready to rise just yet and the selling pressure continues as we finally enter the buying climax phase. However, as the pair attempt to rally the first candle we see is a narrow spread up candle with a deep upper wick, hardly a sign of strength, on high volume. The pair are not ready to rise just yet, and the following two candles confirm this, with very low volume. The second of these is particularly significant with a wide spread and ultra-low volume. The AUD/USD pair then roll over again and back down into the congestion area, which I have marked on the chart with the two yellow lines, and this is the ceiling of resistance that we would now be monitoring, along with the floor of support below. Any break above through this resistance area would now need to be supported with good rising volume. It doesn't have to be 'explosive' volume, and in many ways, it is better that it isn't – just steady and rising. If this were a gap up breakout, as we saw in earlier examples, then we do expect to see volumes well above average, and even ultrahigh if the move is dramatic. But for normal breakouts through an area of resistance, then above average is fine. • • • • Fig 10.20 is another very popular futures index for scalping traders, the ES E-mini which is a derivative of the S&P 500. However, it is extremely volatile and of all the indices, is the most manipulated by the big operators, which is what I wanted to show here. In this example we are looking at a 10-minute chart, and here we have a complete daily session, sandwiched between a day either side. Working from left to right, as the trading session comes to an end we can see the extremely high-volume bar in red, standing like a telegraph pole above all the others. The big operators are clearing out of the market preparing for the following day. This ultra-high volume is associated with a shooting star candle, a sure sign of selling, followed by an up candle with very high volume, which goes nowhere. The big operators are selling into the market and struggling to hold it at this level. Finally, the session ends with a small doji on average volume. The following day, the market opens at much the same level as the close of the night before, with a classic trap up move by the big operators, a wide spread up candle on low to average volume. Compare this volume with that of the up candle of the night before following the shooting star candle. The price spread is much the same, but the volume is substantially lower. This is a TRAP up move, and one that was prepared the night before. It is a classic move that happens all the time, particularly at the open of a session, and you will see this time and time again in the futures markets and the cash markets. The insiders, whether they are the operators or the market makers, love to trap traders into weak positions, and this is the easiest time to do it, when traders are waiting for the market to open, eager with anticipation, and jump in making emotional trading decisions, frightened to miss out on a nice move higher or lower. Then the selling starts, and down it goes! Easy really, and given the chance we would do the same! It goes without saying that volume is the ONLY way to see these tricks in action – watch out for them and you will see them ALL the time, in every market, and in every time frame. • Finally, and just to prove the point, on the third day on our chart the market opens gapped up, but look at the volume – it's high, and well above the volume of the previous day, so this is a genuine move, and the big operators are buying into the bullish trend higher. • Whatever the instrument we are trading, we must try to have an idea of what is high, low and average volume. So that when these extremes of volume do appear, they do not distort our view of what follows in the remainder of the trading session. Chapter Eleven – Putting it together • “The Market does not run on chance or luck. Like the battlefield, it runs on probabilities and odds.” David Derma • • • • • • • • • The chart in Fig 11.10 really explains all we need to know about price congestion and how it relates to the volume breakout when it arrives. As we can see the chart covers an extensive period with 70 candles in this phase. The initial entry into the congestion phase is marked by a pivot low which gives us the floor of our price congestion, and two bars later a pivot high is posted with above average volume. The GBP/USD is weak and not ready to move higher with the pair then falling on declining volume, so weakness, but not a trend that will be sustained. And the reason should now be obvious - falling prices and falling volumes. Volumes then decline in general moving between buying and selling, and as the market moves sideways in the congestion phase, we see two further pivot highs posted, followed by a pivot low. These are followed by a whole series of pivots, both at the ceiling and the floor of the congestion, and as I explained earlier when we were examining this concept, you do have to think of these levels as rubber bands and not as rods of steel. We can see in this example that the pivot points (the little yellow arrows), are not all in a straight line. The market is not linear and technical analysis is an art and NOT a science, which is why volume software that attempts to predict changes in trend can be unreliable. This analysis must be done manually. At this stage, as the price continues to trade within the congestion, we are waiting for the catalyst, which will be the signal for any breakout. And on this occasion, was provided by an item of economic data in the UK. From memory I believe it was the RPI release. However, the actual release is unimportant. What is important is the reaction on the price chart. First, we have a breakout which moves firmly through our ceiling of resistance, which has now become...... support. And if you remember what I said in the chapter on breakouts – we MUST wait for a clear close well above the congestion phase, and the first candle here delivered this for us. A nice wide spread up candle. Second, we must check that this is a valid move, and the good news is the breakout has been validated by the volume. As this has been an extensive area of price congestion, any break away will require substantial effort which is what we have here with buyers taking the market firmly higher. Can we join the move here? This is what we have been waiting for. We have a market that has been in congestion, waiting, and gathering itself, when finally, the catalyst arrives and the market moves on high volume. Furthermore, we now have a deep area of natural price protection in place below, and our stop loss would be below the level of the last pivot low. Time has also played its part here, with cause and effect coming into play. Remember, this is a 15-minute chart, so an extended phase of consolidation and congestion, and therefore any consequent effect should reflect the time taken • in building the cause. In other words, the trend, when it breaks, should last for some time. We just must be patient, and wait! This is the power of the congestion phase – it is the spawning ground of trends and reversals. In this case the ceiling was breached, but it could equally have been the floor. The direction is irrelevant. All we wait for is confirmation of the breakout, validated with volume, and then trade accordingly. Once again here let me explain the highlights and key points. As we can see the pair has been rising, but the market moves lower as shown by a wide spread down candle. This is followed by a narrow spread down candle with above average volume, and signaling possible buying on this reversal lower. The market pushes higher on the next candle, a wide spread up bar, and posts a pivot low as shown with the small yellow arrow. We are now looking for a possible pivot high which will start to define a potential period of congestion. • This duly arrives two bars later, and the pivot high is now in place. Now we are watching for a potential congestion phase, and further pivots to define the trading range. However, on this occasion, the next candle breaks higher and moves firmly away from this area. The potential congestion phase we were expecting has not materialized, so we know this was simply a minor pause in the trend higher, as the pair move up on good volume. • Two candles later, another pivot high is formed, and once again we are now looking for our pivot low to form and define our levels of any congestion phase. In this example the pair do indeed move into congestion, with low volume, and on each rally a pivot high is posted which gives us a nicely defined ceiling. However, there are no pivots defining the floor. Does this matter? • And this is the reason I wanted to highlight this example to make the point, that in fact it doesn't. A pivot is a unique combination of three candles which then create the pivot, and this helps to define the region for us visually. Pivots also help to give us our 'roadmap' signals of where we are in the price journey. But, sometimes one or other does not arrive, and we must rely on our eyes to define these levels. After all, a pivot is simply an indicator to make it easier for us to see these signals. In this case the pivot high forms, but there is no corresponding pivot low, so we are looking for a 'floor' to form. • After four candles, the market moves higher again and posts a second pivot high, so we have our ceiling well defined, and this is now resistance. The next phase lower made up of three candles then stops at the same price level, before reversing higher again. We know this pair is not going • • • • • • to fall far anyway, as we have a falling market and falling volume. Our floor of support is now well defined by the price action, and it is clear from the associated volume, that we are in a congestion phase at this level. And, my point is this. When using any analytical method in technical analysis, we always must apply a degree of leeway and common sense. Whenever a market moves into a region of price congestion, it will not always develop the perfect combinations of pivot highs and pivot lows, and we then must apply common sense as here, bolstered, of course, by our volume. At the start of this congestion phase, we have a very good idea that we are entering a congestion phase, simply from an assessment of the volume. The volume is all well below average (the white dotted line) therefore we already know that we are in a congestion phase, and the pivots are merely aids, to help define the price region for us. Therefore, whilst pivots are very important it is the volume which will also help to define the start of a congestion phase, and the pivot highs and lows are there to help to define the floors and ceilings of the trading range. If one or other is missing, then we simply revert to using our eyes and common sense. Ironically, here too, we have a phase which is once again marked by pivot highs, but no pivot lows. However, the volume and price action tell us exactly where we are in the price journey. We simply wait for the next phase to start, which it does, several hours later. Again, how do we know? Volume gives us the answer. The breakout has been associated with above average volume, which is what we expect to see, and off we go again. Reading a chart in this way is not difficult. Every market moves in this way. They trend for a little, then consolidate in a congestion phase, then continue the trend or reverse completely. If you understand the power of VPA and combine it with a knowledge of price congestion, then you are 90% of the way there. The rest is practice, practice and more practice, and it will come. This concept involves using multiple time frames to analyses price and volume. It allows us to qualify and quantify the risk of any trade, and assess the relative strength or weakness of any trade, and so its likely duration. In other words, multiple time frames will reveal the dominant trend and primary bias of the instrument under consideration. Fig 11.12 represents our three-time frames. Despite its size we can see both price and volume and this method of analysis is something I teach in my online and offline seminars. • • • • • • • • • • • What we have in Fig 11.12 are three charts for cable (GBP/USD). The chart at the top of the image is the 30 minutes and is what I often refer to as our ‘benchmark’ chart. In this trio it is this chart which gives us our bias, and is the one against which we relate the other two. Bottom right is the 15 minutes, and the chart at bottom left is the 5 minutes. All the charts are taken from one of my favorite platforms for spot forex, namely MT4. The candle I have highlighted on the 30-minute chart is a shooting star, with ultra-high volume, sending a clear signal of weakness at this level. The shooting star was pre-ceded by a narrow-spread candle also with ultra-high volume, and which gave us our initial signal. But how does this appear on our faster time frames? On the 15-minute chart the shooting star is two candles, and on our 5-minute chart it is six candles. The 30-minute chart is there as our slower time frame, our dominant or benchmark time frame, which tells us where we are in the slower time frame trend. Imagine we are looking at price action using a telescope. This is where we are viewing from some way off, so we can see all the price action of the last few days. Then using our telescope, we start to zoom in, first onto the 15-minute chart, and then in fine detail to the 5-minute chart. By using the 15-minute chart we are seeing both sides of the price action if you. A slower time frame helps in gaining a perspective on where we are in the longer-term journey, and a faster time frame on the other side will give us the fine detail view of the related price action. What do we see here? First the shooting star sent a clear signal of weakness, and on our 15minute chart this is reflected in two candles, with high volume on the up candle which is also topped with a deep wick to the upper body. And here the point is this. If we had seen this price action in isolation on the 15-minute chart, it may not have been immediately obvious what we were looking at here. It takes a mental leap to lay one candle over another and imagine what the result may be. The 30-minute chart does this for us, and in addition, and perhaps more importantly, if we had a position in the market, the 30-minute chart is instantly more recognizable as possible weakness than the 15 minutes. So, two benefits in one. If putting two candles together to create one is difficult, putting six candles together is almost impossible, and yet this is the same price action represented on the 5-minute chart. The market then moves into consolidation, which again is much easier to see on the slower time frame chart than the faster ones, and I have deliberately left the pivot points off these charts, so that the charts remain as clear as possible. The next point is this. In displaying a slower time frame above, this also gives us a perspective on the 'dominant' trend. If the dominant trend is bullish on the 30-minute chart, and we decide to take a position on our 15-minute chart which is bullish, then the risk on the trade is lower, since we are trading with the dominant trend. We are trading with the flow, and not against the flow. Swimming with the tide and not against it. If we take a position that is against the dominant trend in our slower time frame, then we are counter trend trading, and two conditions then apply. First, the risk on the trade is higher, since we are trading against the dominant trend of our lower time frame, and second, we are unlikely to be holding the position long, since the dominant trend is in the opposite direction. In other words, what we are trading here is a pull back or a reversal. There is nothing wrong with this, as everything in trading is relative. After all a reversal on a daily chart might last several days. It is all relative to the time frame. The third reason for using multiple charts is that this also gives us a perspective on changes in trend as they ripple through the market, this time in the opposite direction. The analogy I use here is of the ripples in a pond. When you throw a pebble into the center of a small • pond, as the pebble hits the water, the ripples move out and away before they eventually reach the edge of the pond. This is what happens with market price action. Any potential change in trend will be signaled on our fast time frame chart. This is where you will see sudden changes in price and volume appear first. If this is a true change, then the effect will then appear on the primary chart, which in this case is the 15 minute chart, before the change ultimately ripples through to our 30 minute chart, at which point this change is now being signaled on the dominant chart.