Table Table of Contents
Chapter 1: Volume: Why Is It Important? Chapter 2: Understanding Price Bars Chapter 3: Understanding Volume at Key upport and !esistance "reas Chapter #: Understanding Volume in $rends Chapter %: Volume and &i'ergence Chapter (: Wyc)o** pring and Upthrust Chapter +: Incorporating Volume in ,our $rading Plan Using the $-& Indicators Chapter .: Incorporating Volume into ,our $rading Plan /ithout the $-& Indicators Chapter 0: Volume Versus Versus $ic) Count Inde
Table Table of Contents
Chapter 1: Volume: Why Is It Important? Chapter 2: Understanding Price Bars Chapter 3: Understanding Volume at Key upport and !esistance "reas Chapter #: Understanding Volume in $rends Chapter %: Volume and &i'ergence Chapter (: Wyc)o** pring and Upthrust Chapter +: Incorporating Volume in ,our $rading Plan Using the $-& Indicators Chapter .: Incorporating Volume into ,our $rading Plan /ithout the $-& Indicators Chapter 0: Volume Versus Versus $ic) Count Inde
Table of Contents Chapter 1: Volume: Why Is It Import Important? ant? Chapter 2: Underst Understanding anding Price Bars
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Chapter 3: Understandi Under standing ng Volume at Key upport and !esista !esistance nce "reas Chapter #: Underst Understanding anding Volume in $rends Chapter %: Volume and &i'ergen &i'ergence ce Chapter (: Wyc)o** pring and Upthrust
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3+ #2 %3
Chapter +: Incorp Incorporatin orating g Volume in ,o ,our ur $rading Plan Using the $-& Indica Indicators tors Chapter .: Incorp Incorporatin orating g Volume into ,o ,our ur $rading Plan /ithout the $-& Indica Indicators tors Chapter 0: Volume Versus $ic) Count
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Copyright 212 $raders-elp&es)4com
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Chapter 1 Volume: Why Is It Important
Chapter 1: Volume: Why Is It Important?
Basically5 'olume is a measurement tool that re*lects the o'erall acti'ity in an instrument 6ased on the num6er o* 6uyers and sellers in the mar)et4 In other /ords5 'olume sho/s the enthusiasm o* 6uyers or sellers during a speci*ied period5 as /ell as the li7uidity o* the instrument4 "lthough 'olume may 6e displayed di**erently on charts5 it is typically displayed as a single5 non8directional5 histogram /hich represents the total num6er o* 6uyers and sellers *or a gi'en period4 9on8directional means that as price is ma)ing higher highs or lo/er lo/s5 the 'olume 6ars /ill typically 6e ma)ing ne/ highs4 or eample5 in igure 1: Standard Volume Indicator 5 the red histogram 6ar at the 6ottom o* the chart represents the o'erall num6er o* 6uyers or sellers *or each 1% minute 6ar4 " trader may loo) at this type o* 'olume representation to e'aluate the li7uidity o* the instrument4 $his tells him or her /hether there is su**icient acti'ity to ena6le one to enter or eit a position easily4
Figure 1: Standard Volume Indicator
Volume can also 6e displayed as Volume Up ;6uyers< or Volume &o/n ;sellers<4 igure 2: Volume Up vs. Volume Down 5 sho/s the 'olume displayed as t/o separate indicators5 Volume Up ;green histogram 6ars< and Volume &o/n ;red histogram 6ars<4 By displaying 'olume in this manner5 a trader can compare the 6uying 'olume to the selling 'olume *or a speci*ied period4
Figure 2: Volume p !s" Volume #o$n
By comparing the t/o 'olume displays5 a trader can assess /hether there is more enthusiasm sho/n 6y the 6uyers or 6y the sellers during a speci*ied period4 In an uptrend5 6uyers should ha'e more enthusiasm than sellers4 When a mar)et reaches a top5 6uyers /ill lose enthusiasm and sellers /ill ta)e o'er4 In a do/ntrend5 sellers should ha'e more enthusiasm than 6uyers4 "t the 6ottom5 sellers /ill lose enthusiasm and 6uyers /ill ta)e o'er4 -o/e'er5 this change in 6uying or selling interest is typically 'ery su6tle4 Buyers or sellers /ill come in 'ery slo/ly to test price at either the highs or lo/s4
igure 3: Volume Comparison sho/s the same chart as igure 25 6ut /ith hori=ontal lines dra/n at 2%4 Comparing the 6uyers to the sellers using this le'el5 you can see that sellers sho/ed more enthusiasm than 6uyers *or a period o* time4 $hen at Point "5 6uyers 6egan to ta)e o'er4 "t Point B5 sellers tried to come 6ac) 6ut sho/ed a lac) o* enthusiasm5 as they /ere not a6le to push price lo/er4 "t this point5 6uyers stepped in and 6egan to push price up/ard4
Figure %: Volume Comparison
"s can 6e seen in igure 35 the turno'er in enthusiasm /as 'ery discreet4 ellers did not >ust eit the mar)et in one 6ar4 Instead5 they lost interest as price /as mo'ing lo/er ;Point "<4 $hen they re8entered to determine /hether there /ere su**icient sellers to ena6le price to continue the do/n/ard mo'ement ;Point B<4 -o/e'er5 the *act is that sellers could not push price lo/er4 $his indicated to the 6uyers that the sellers had lost interest4 $hen5 6uyers 6egan entering the mar)et5 pushing price up/ard4
$he hidden secret in this echange /as a decrease in selling acti'ity at the lo/ o* Point "4 Instead o* dri'ing price lo/er5 sellers interest decreased4 $his /as the *irst sign o* /ea)ness in price continuing to mo'e *urther do/n4 $he *inal test o* sellers interest /as at Point B5 /hen e'en though more sellers came in5 they could not push price lo/er4 or all their enthusiasm and interest5 there /as no re/ard *or their e**ort 6ecause price did not go lo/er4 "t this point5 the 6uyers@ interest o'er/helmed the sellers@ interest and price increased4 $he result is sho/n in igure #: Results from Seller’s Lack of Enthusiasm 4
Figure &: 'esults from Sellers( )ac* of +nthusiasm
When comparing igure 3 and igure #5 the change o* interest ;*rom selling interest to 6uying interest< preceded the up/ards price mo'ement4 It is *or this reason that 'olume is considered to 6e a leading indicator5 as the selling 'olume or lac)5 thereo* 5 heralds the up/ard price mo'ement4 "s /ith most other trading indicators5 'olume can 6e as comple or as simple as a trader chooses to ma)e it4 $oday5 there are many types o* 'olume indicators a'aila6le4 ome are 6ased on a'erages o* actual transactions o* 6uyers 'ersus sellers o'er a speci*ied period4 Athers are 6ased on order *lo/5 a measurement o* 6uyers 'ersus sellers *rom actual order *lo/4 ome are more complicated than others and there is no one 'olume indicator that is magical4 $he e**icacy o* a 'olume indicator is more dependent upon ho/ /ell the trader can understand and interpret the 'olume at any gi'en period than on the indicator itsel*4 &uring my struggle to understand 'olume5 I o*ten 6ecame discouraged trying to di**erentiate 6et/een the 'olume 6ars that mattered 'ersus the 'olume 6ars that should 6e ignored4 I read many 6oo)s on the importance o* 'olume4 Un*ortunately5 it /as li)e reading a *oreign language4 Una6le to understand it5 I /ould gi'e up5 only to re'isit the concept later4 inally5 a*ter ta)ing a course on Cumulati'e &elta Volume "nalysis5 the mysterious principles 6ehind the importance o* 'olume as a trading indicator 6ecame
increasingly clear to me4 With this ne/ *ound clarity5 I /anted to *ind a simpler /ay *or my students to grasp the magic o* /hat I no/ understood4 $he *irst concept that must 6e appreciated 6y any student o* 'olume is that the ke to volume analsis! resides in whether a price "ar makes a hi#h or a low. I* a price 6ar
does not ma)e a high or a lo/5 i4e4 an inside 6ar5 then the 'olume really does not matter4 $his eliminates the need to study a 'olume 6ar that has no signi*icance4 $here*ore5 these 'olume 6ars can 6e eliminated4 igure %: $%D &ree Volume sho/s the resulting 'olume analysis indicator /ith the 'olume 6ars eliminated /hen price has not made
a high or a
lo/4
Figure ,: T-# Free Volume
$he dar) cyan 6ars indicate the 'olume /hen price ma)es a ne/ high4 $he red 6ars indicate the 'olume /hen price ma)es a ne/ lo/4 $he gray 6ars indicate /hen a
price 6ar ma)es a ne/ high and a ne/ lo/ on the same 6ar5 i4e4 an outside 6ar4 When this occurs the trader must loo) to see i* the close o* the price 6ar /as at the top or the 6ottom4 I* the price did not close at the top or 6ottom then the 'olume 6ar is ignored4 &i#ure '( Volume Interpretation at %i#hs and Lows illustrates ho/ to read the gray
'olume 6ars4 Point " ma)es 6oth a -igh and o/ ;outside 6ar< and the price 6ar closes in the middle4 $his /ould 6e considered a neutral price 6ar and the 'olume /ould 6e ignored4 Point B5 also ma)es 6oth a -igh and o/ ;outside 6ar<4 -o/e'er5 the price 6ar closes at the 6ottom o* the 6ar and should 6e read as a seller@s 6ar4 $hen5 at Point C5 the price ma)es another outside 6ar ;6oth a high and lo/ on the same 6ar< 6ut closes at the 'ery top4 $here*ore5 the 'olume 6ar at Point C should 6e read as a 6uyer@s 6ar4
Figure .: Volume Interpretation at -ighs and )o$s
A* course5 to understand the signi*icance o* 'olume /hen price ma)es a high or a lo/5 the trader must 6e a6le to determine $hen price ma)es a high or a lo/4 $his is
discussed in the net chapter4
Chapter 2 nderstanding /rice 0ars
Chapter 2: nderstanding /rice 0ars
" price 6ar typically has *our components: Apening Price5 Closing Price5 -igh Price and o/ Price4 $he opening price indicates /here the instrument@s price /as at the moment the price 6ar 6egan4 $he closing price indicates /here the instrument@s price /as at the moment the price 6ar ended4 $he high price indicates the highest price the instrument achie'ed during the speci*ied period4 $he lo/ price indicates the lo/est price the instrument achie'ed during the speci*ied period4
Figure :
/rice 0ar
Components
In &i#ure )( Components5 the
*rice +ar
*irst price 6ar is
)no/n as the Apen5 -igh5 o/ and Close price 6ar4 $he open price is indicated 6y the dash on the le*t side o* the 'ertical line4 $he close price is indicated 6y the dash on the right side o* the 'ertical line4 $he top o* the 'ertical line is the high and the 6ottom o* the 'ertical line is the lo/4 Price 6ars t/o and three are 6oth candlestic) 6ars4 When using candlestic)s5 i* the 6ar is green5 it is considered an up 6ar4 $o get an up 6ar5 the closing price must al/ays 6e greater than the opening price4 I* the 6ar is red5 it is considered a do/n 6ar4 $o 6e considered a do/n 6ar5 the closing price must al/ays 6e lo/er than the opening price4 I* the price 6ar is gray5 then the opening price and closing price are the same4
ince a price chart is comprised o* many price 6ars displayed together5 /e loo) *or patterns /ithin the price 6ars to predict /here price may go in the *uture4 $here are se'eral price 6ar *ormations that are predicti'e o* /here price may go4 et@s 6egin /ith an isolated high4 igure .: Isolated %i#h sho/s that the last 6ar on the chart is an up 6ar 6ecause the high o* the 6ar is higher than that o* the pre'ious 6ars4 -o/e'er5 /hen /e loo) at the close5 it is greater than the open 6ut near the 6ottom o* the 6ar4 In other /ords5 price opened and 6uyers pushed price up and then sellers came in and pushed price 6ac) do/n4 $his indicates that the net 6ar should 6e a do/n 6ar4
Figure : Isolated -igh
igure 0: $hree +ar Reversal to Downside sho/s that the net 6ar has *ormed and it is a do/n 6ar4 9otice that the close o* the do/n 6ar is also lo/er than the lo/ o* the 6ar *orming the isolated high4 $his pattern is )no/n as a three 6ar re'ersal to the do/nside indicating that price should go lo/er4 " necessary condition *or a three 6ar re'ersal is that the do/n 6ar *ollo/ing the isolated high 6ar must close lo/er than the lo/ o* the isolated high 6ar4
Figure 3: Three 0ar 'e!ersal to #o$nside
igure 1: Isolated Low sho/s that the last 6ar is an isolated lo/ 6ecause the lo/ o* that 6ar is lo/er than the pre'ious 6ars4 $he close5 although less than the open5 is at the 'ery top o* the 6ar4 $his means that sellers stepped in and lo/ered prices only to ha'e 6uyers o'erta)e them5 pushing the price 6ac) up4 $his indicates that the net 6ar should 6e an up 6ar4
Figure 14: Isolated )o$
igure 11: $hree Bar !e'ersal to Upside sho/s that the net 6ar did go up and that the close o* that 6ar /as higher than the high o* the isolated lo/ there6y *ul*illing the conditions *or a three 6ar re'ersal5 this time to the upside4 $here*ore5 price should mo'e up/ard4 "s you can see5 price did go up4
Figure 11: Three 0ar 'e!ersal to pside
igure 12: En#ulfin# *attern sho/s price /as mo'ing up and then the last 6ar on the chart ;red candlestic)< totally engul*s the pre'ious 6ar4 In other /ords5 the high is higher than the pre'ious 6ar and the lo/ is lo/er than the pre'ious 6ar ;also )no/n as an outside 6ar<4 ince the close /as at the 6ottom o* the 6ar5 this signals a re'ersal in trader sentiment and the mar)et should no/ ma)e a ne/ lo/4
Figure 12: +ngulfing /attern &i#ure ,-( En#ulfin# *attern $pe $wo sho/s a second type o* engul*ing 6ar pattern4 "t Point "5 the price
6ar goes do/n and closes at the 6ottom4 $hen5 the net price 6ar5 Point B5 opens and closes on the high4 ome traders also re*er to this as an engul*ing pattern5 as /ell5 since price /ent straight do/n and then came straight 6ac) up4 $his is a /ea)er type o* engul*ing pattern4
Figure 1%: +ngulfing /attern Type T$o
$he engul*ing pattern usually occurs only a*ter a su6stantial do/n/ard mo'ement or su6stantial up/ard mo'ement4 &i#ure ,( Do/i +ar sho/s an isolated lo/ indicating that sellers /ere a6le to ta)e
price do/n to a ne/ lo/ and then 6uyers stepped in and re'ersed the price mo'ement so that it closed eactly at the open o* the 6ar4 $his is also a re'ersal pattern4 "lso5 notice that the preceding 6ar is also a do>i4 -o/e'er5 the di**erence is there /ere only three tic)s o* mo'ement in this 6ar4 It opened5 mo'ed do/n one tic)5 then mo'ed up one tic) and closed eactly /here it opened4 It gi'es us no clue as to /hether 6uyers or sellers controlled the 6ar since there /as not su**icient price mo'ement4
Figure 1&: #o5i 0ar &i#ure ,0( Results of the Do/i +ar sho/s the resulting price action a*ter the do>i4
Figure 1,: 'esults of the
"nother pattern indicati'e o* the outside 6ar4 &i#ure ,'(
#o5i 0ar
/here price is li)ely to go is 1utside +ar sho/s this
*ormation4 $he *inal 6ar totally encompasses the pre'ious 6ar;the condition *or a 6ar to 6e considered an outside 6ar< and closes do/n4 $his indicates that price should continue do/n/ard4
Figure 1.: 6utside 0ar &i#ure ,)( Results of 1utside +ar sho/s that price does continue do/n/ard as
anticipated4
Figure 1: 'esults of 6utside 0ar
$he opposite o* the Autside Bar is the Inside Bar4 &i#ure ,2( Inside +ar sho/s this particular price *ormation4 $he price 6ars directly 6eneath Points " and B *orm inside 6ars 6ecause their mo'ement /as encompassed /ithin the pre'ious price 6ar4 $his type o* 6ar tells us that price is pausing4 In other /ords5 6uyers and sellers are anticipating their net mo'e4 Ane trading strategy /ith inside 6ars is to mar) the high and lo/ o* the 6ar that preceded the inside 6ar and then trade in the direction o* the 6rea)out range4 or instance5 in this eample5 the price 6ar a*ter Point "5 closed a6o'e the high o* the line at Point " and5 there*ore5 an up/ard mo'ement /ould 6e anticipated4
Figure 1: Inside 0ar
An the li'e edge o* the mar)et5 there /ill 6e many isolated highs5 isolated lo/s and re'ersal 6ars *ormed throughout the day4 $he )ey in recogni=ing the potential price mo'ement o* the net 6ar is to pay attention to /here the 6ar *orming an isolated high or an isolated lo/ closes5 and /here the re'ersal 6ar *orms4 or isolated highs and lo/s5 the closing price is the most signi*icant indication o* *uture price mo'ement4 I* the isolated high closes at the top5 the net 6ar should 6e up4 -o/e'er5 i* the isolated high closes on or near the lo/5 the net 6ar should 6e do/n4 $he opposite is true o* isolated lo/s4 I* the isolated lo/ closes at the 6ottom o* the 6ar5 then /e are epecting the net 6ar to 6e a do/n 6ar4 -o/e'er5 i* the close is at or near the top5 /e are epecting the net 6ar to 6e an up 6ar4 igures 10 to igure 2( sho/ ho/ this plays out on the li'e edge o* the mar)et5 6ar 6y 6ar4 Dach 6ar that made a high on the li'e edge closed at the top o* the 6ar4 $hen price made a high 6ut closed on the lo/ o* the 6ar signaling either the 6eginning o* the retracement or the end o* the trend4
Figure 13: Significance of Closing /rices
Figure 24: Significance of Closing /rices
Figure 21: Significance of Closing /rices
Figure 22: Significance
of Closing /rices
Figure 2%: Significance of Closing /rices
Figure 2&: Significance of Closing /rices
Figure 2,: Significance
of Closing /rices
Figure 2.: Significance of Closing /rices
While re'ersal 6ars are o*ten used *or identi*ying mar)et tops or mar)et 6ottoms5 they can also 6e used *or identi*ying /hen a potential retracement /ill occur and5 a*ter/ards5 the resumption o* the trend ;trend continuation entry<4 or eample5 i* price is mo'ing up5 a re'ersal 6ar can signal the 6eginning o* a retracement4 "t the end o* the retracement5 another re'ersal 6ar can appear5 /hich signals a possi6le entry point into the continuing trend4 &i#ure 3)( Reversal +ar for Retracement and for Entr Into $rend sho/s these re'ersal patterns4 "t Point "5 /e ha'e the do>i 6ar *ormation
indicating a re'ersal4 Price re'erses to the do/nside and another re'ersal 6ar is *ormed at Point B signaling the end o* the do/n/ard mo'ement4
Figure 2: 'e!ersal 0ar
for 'etracement and for
+ntry Into Trend
!emem6er5 in Chapter Ane5 /e learned that 'olume is a leading indicator5 meaning that it /ill lead price4 $o understand this concept5 let us apply 'olume to the chart a6o'e and see i* 'olume did in *act lead price in these mo'ements4 In an uptrend5 'olume should 6e increasing on the highs4 In a do/ntrend5 'olume should 6e increasing on the lo/s4 &i#ure 32( Diver#in# Volume on Reversal +ars sho/s that at Point "5 on the high5
instead o* increasing 'olume there is decreasing 'olume4 "lso5 notice that instead o* measuring *rom 'olume 6ar to 'olume 6ar5 /e measure *rom the largest 'olume 6ar that *ormed a high to 'olume 6ars that *ormed su6se7uent highs4 Using this techni7ue5 /e can see that at the close o* the price 6ar at Point "5 there are t/o di'ergences4 -o/e'er5 since /e are not using any other indicators on the chart5 it is the close o* the 6ar a*ter Point " that con*irmed the re'ersal 6ecause the close /as 6elo/ the lo/ o* Point " thus ma)ing it a re'ersal 6ar4 $hen at Point B5 /hen price made a ne/ lo/ and *ormed a re'ersal 6ar5 the selling 'olume /as decreasing not increasing4 "gain5 /e measure su6se7uent lo/ 'olume 6ars against the largest 'olume 6ar on a lo/4 Both o* these5 di'erging 'olume and a re'ersal 6ar at a lo/5 indicated that 'olume /as not in alignment /ith price so that price /as li)ely to change direction4
Figure 2: #i!erging
Volume on 'e!ersal 0ars
"lthough there /ere se'eral di'ergences as price /as ma)ing lo/er lo/s5 it /as the di'ergence /ith the com6ination o* a re'ersal 6ar that con*irmed a shi*t to 6uying sentiment /as in progress4 &i#ure 34( Result of Decline in Sellers sho/s the results o* the di'erging 'olume on
a re'ersal 6ar4 ince sellers /ere una6le to mo'e price lo/er on increasing 'olume5 6uyers stepped 6ac) into the mar)et and price /ent up again4
Figure 23: 'esult of #ecline in Sellers
While reading price 6ars com6ined /ith 'olume is important5 predicting /here price is li)ely to go is crucial in calculating your ris) to re/ard potential4 I* price is only going
to mo'e eight tic)s and the ris) is siteen tic)s5 then /ithout a 'ery high /inning percentage5 a trading account /ill su**er signi*icant dra/do/ns 'ery 7uic)ly4 $he net chapter discusses ho/ to anticipate price mo'ement 6ased on support and resistance4
Chapter % nderstanding Volume at 7ey Support and 'esistance 8reas
Chapter %: nderstanding Volume at 7ey Support and 'esistance 8reas
upport and resistance areas are points /here price /ill most li)ely come to a halt or /ill re'erse direction4
$here are numerous methods *or identi*ying o* support and
resistance areas4 $he most natural support or resistance area is prior highs and lo/s4 "nytime price ma)es a ne/ high5 the ne/ high /ould 6e considered a resistance area4 When price 6rea)s the resistance area5 ;highs< it then 6ecomes support4 "nytime price ma)es a lo/5 it is considered a support area4 $hen5 /hen price 6rea)s the support area ;lo/s<5 /hat /as pre'iously support 6ecomes an area o* resistance4 upport and resistance can also 6e identi*ied using lines 6ased on a mathematical calculation deri'ed *rom de*ined price points ;either using the open5 high5 lo/5 and close or any com6ination o* these price points<4 u6se7uently5 i* price is a6o'e the line5 then the line is considered to 6e support4 I* price is 6elo/ the line5 then the line is considered to 6e resistance4 Eust a *e/ o* the di**erent types o* support and resistance lines that traders use are as *ollo/s: •
Bollinger Bands
•
Keltner Channels
•
inear !egression Channels
•
Fo'ing "'erages
•
•
"$! ;"'erage $rue !ange< Pi'ot ines
•
i6onacci ines
•
$riangles and Pennants ;6ased on trendlines<
$he type o* support and resistance that a trader chooses to use is a personal choice4 Ane main purpose *or using any o* the indicators listed a6o'e is to identi*y areas o* support and resistance4 In other /ords5 traders are simply identi*ying /here price /ill meet support ;price is a6o'e the line< or resistance ;price is 6elo/ the line<4 It really is that simple4 Instead o* *ocusing on /hich magical indicator to use *or support and resistance5 the trader needs to *ocus on three )ey elements: •
Consistency 8 using the same methodology and indicators day in and day out
•
Price at the support or resistance le'els
•
Volume at the support or resistance le'els
Be*ore /e discuss 'olume at )ey areas5 let@s tal) a6out consistency5 /hich is a )ey element that most traders lac)4 Consistency means that you are doing the same thing day in and day out /hich ultimately should lead to consistent pro*its4 I* today you are using Bollinger Bands and tomorro/ you are using i6onacci ines5 then you are not 6eing consistent4 ure there are days /hen one method /ill /or) 6etter than another4 "nd the net day5 the other method might /or) 6etter4 Dach day in the mar)et is uni7ue4 Constantly changing your charts /ill create a sense o* chaos and your charts /ill re*lect it4 By ha'ing too many support and resistance lines on your chart5 you are *ro=en4 Price /ill al/ays 6e co'ered and there /ill al/ays 6e a reason5 6ased on the 'arious support and resistance areas5 not to ta)e a trade4 Instead5 pic) one or t/o that you li)e and stic) /ith them4 $his /ay you can measure your progress and5 since you
are al/ays using the same concepts day in and day out5 you can identi*y /hen something out o* the ordinary is occurring4 In other /ords5 on your charts5 using the same concepts each day5 you 6ecome an epert in reading your mar)et5 your chart5 and the support and resistance method that you chose4 9o/5 let@s 6egin 6y loo)ing at some o* the easiest and simplest concepts to identi*y using price and 'olume4 In the *ollo/ing eamples5 I /ill 6e using an eighty period mo'ing a'erage to identi*y either the support or resistance area4 "t points " and B in &i#ure -5( Volume and 25 *eriod 6ovin# 7vera#e 5 each time price touched the mo'ing
a'erage5 di'ergence *ormed on the highs4 $his indicated that 6uyers /ere not interested and sellers could easily ta)e price 6ac) do/n due to lac) o* interest 6y the 6uyers4
Figure %4: Volume and 4 /eriod 9o!ing 8!erage
Volume indicates interest4 I* 6uyers /ere interested5 the 'olume 6ars /ould 6e increasing as price approached the slo/ mo'ing a'erage4 $ypically5 they /ould *irst 6rea) the mo'ing a'erage on increasing or high 'olume4 $hen5 price /ould retrace and test the same area it >ust 6ro)e4 $his con*irms that the area has 6ecome a support area *or price to increase4
In &i#ure -,( Volume and *rice +reakin# Resistance5 price 6rea)s the . period mo'ing a'erage on high 'olume and then immediately returns to test *or support4 "s it is approaching the eighty period mo'ing a'erage it does so on decreasing 'olume4 $he lac) o* sellers con*irms that the eighty period mo'ing a'erage has *ound support and price /ill continue up/ard4
Figure %1: Volume and /rice 0rea*ing 'esistance
In &i#ure -3( Volume and *rice +reakin# Support 5 sho/s >ust the opposite scenario4 Price 6rea)s the eighty period mo'ing a'erage on high 'olume4 $hen price returns to the same area to test *or resistance4 "s it returns5 the 'olume decreases indicating a lac) o* interest 6y the 6uyers and price continues do/n4
Figure %2: Volume and
/rice 0rea*ing Support
9o/5 let@s loo) at an eample that sho/s the eighty period mo'ing a'erage not supporting a price mo'ement to the upside4 In &i#ure --( Volume and *rice not Supportin# 6ove5 price 6rea)s the eighty period mo'ing a'erage and then 6egins
retracing to the same area4 -o/e'er5 this time there is no decrease in sellers4 In *act5 price ma)es a lo/er high ;Point "< slightly a6o'e the mo'ing a'erage and sellers step 6ac) in5 ta)ing control ;Point "1<4 In other /ords5 sellers /ere still interested in ta)ing price lo/er4 "*ter ma)ing a ne/ lo/ ;Point B<5 they go 6ac) to test the mo'ing a'erage *or resistance4 "lthough they initially 6ro)e through the eighty period mo'ing a'erage at Point C5 they did so on decreasing 'olume ;Point C1<5 so sellers immediately identi*ied this as /ea)ness and step 6ac) in ;Point C2<4
Figure %%: Volume and
/rice not Supporting 9o!e
Price points can also 6e used *or support and resistance4 In other /ords5 /hen price ma)es a high5 it is considered to 6e a resistance area4 When price ma)es a lo/5 it is considered to 6e an area o* support4 In &i#ure -! Lower Volume at *revious %i#h 5 at Point "5 price ma)es a ne/ high4 It then retraces on decreasing 'olume5 indicating that the pre'ious high ;Point "< /ould 6e retested4 Price goes 6ac) to this area and ma)es a ne/ high ;Point B<4 When the 'olume o* these t/o areas is compared5 the 'olume at Point B is lo/er than the 'olume at Point "4 $his indicates that 6uyers are potentially losing interest and there /ill 6e a test to see i* sellers are interested4
Figure %& )o$er Volume at /re!ious -igh
By reading the 'olume /ith price at )ey areas o* support and resistance5 traders can identi*y strength or /ea)ness in a potential upcoming mo'e4
Chapter & nderstanding Volume in Trends
Chapter &: nderstanding Volume Volume in Trends
"s any pro*essional pro*essional trader trader /ill tell tell you5 trading trading /ith /ith the trend trend is easier easier than than trying to trade against the trend ;counter8trend trading<4 By learning to read the 'olume at )ey areas /ithin the trend5 a trader has an ecellent opportunity to enter the trend /hile maintaining a lo/ ris)5 high pro6a6ility trend trade4 In this chapter5 /e /ill *ocus on the easiest 'olume patterns to identi*y that occur /ithin trend mo'ements4 $o understand and 6e a6le to read 'olume /ithin a trend5 a trend must *irst 6e de*ined4 "n uptrend is de*ined as a series o* higher highs and higher lo/s4 While a do/ntrend is the opposite5 a series o* lo/er lo/s and lo/er highs4 It is the 'olume acti'ity at the highs or lo/s that is most critical4 &uring an uptrend 'olume should should 6e decreasing on the lo/s4 &uring a do/ntrend 'olume should 6e decreasing on the highs4 In &i#ure -0( Volume at Lows in Uptrend 5 a*ter price made a high at Point "5 it 6egan to retrace4 &uring this retracement5 the 'olume /as decreasing as price made lo/s ;Point B<4 $his indicated that sellers had no strength ;or a lac) o* interest< in ta)ing prices lo/er5 there*ore5 6uyers /ere still in control4
Figure %,: Volume Volume at )o$s )o$s in ptrend
ince sellers /ere not interested in ma)ing ne/ lo/s5 6uyers /ere easily a6le to ma)e ne/ highs4 $his gi'es the trader a potential entry point4 "dditionally5 a pre'ious lo/ can 6e retested to ensure support *or price to increase4 or eample5 in &i#ure -'( $estin# $estin# Volume at Lows in Uptrend 5 price made a lo/ on decreasing 'olume4 -o/e'er5
price came 6ac) to retest the same lo/4 "t Point B5 the 'olume 'olume /as again lo/er than at Point "5 "5 /here the *irst lo/ /as made4 $his ga'e 6uyers the con*idence to come 6ac) into the mar)et and proceed to ma)e ne/ a high4
&i#ure -'( $estin# $estin# Volume at Lows in Uptrend
9otice that only the 'olume at the comparison lo/s ;Point " and Point B< is measured4 $he 'olume is compared to the pre'ious lo/ to 'eri*y that the lo/ is acting as support to gi'e price the momentum to ma)e a ne/ high4 In a do/ntrend5 the 'olume on the lo/er highs is interpreted4 or eample5 in &i#ure -)( Volume on Lower %i#hs 5 price is ma)ing lo/er lo/s4 $hen5 as price pulled
6ac) to ma)e a lo/er high5 6uyers /ere /ere decreasing4 "gain5 this gi'es the trader a potential entry into the do/ntrend4
Figure %: Volume on
)o$er -ighs
Eust as in the case o* a retest o* the lo/s in an uptrend5 each lo/er high is also suscepti6le to a retest . &i#ure -2( Volume on Retest of %i#h 5 sho/s that price made a ne/ lo/ then 6egan a retracement4 An the retracement5 'olume decreased at the high ;Point "<4 Price then made a ne/ lo/ and 6egan a second retracement4 An the second retracement5 price *ailed to meet the pre'ious high ;Point B< and5 as it /as retracing5 the 'olume /as decreasing4 $his sho/ed a lac) o* interest 6y the 6uyers and ga'e con*idence to sellers that they could easily ta)e price do/n to ne/ lo/s4
Figure %: Volume on 'etest of -igh
$hese are the simplest 'olume patterns that occur /ithin trend mo'ements4 In the net chapter5 /e /ill 6e learning ho/ to read more comple 'olume patterns4 -o/e'er5 to a'oid con*usion5 you should thoroughly understand the 'olume patterns in the pre'ious chapters 6e*ore proceeding as the patterns do get more comple4
Chapter , Volume and #i!ergence
Chapter ,: Volume and #i!ergence
Up until no/5 I ha'e a'oided using the /ord di'ergence4 $his is 6ecause I ha'e *ound that traders tend to *ocus on the /ord di'ergence and to memori=e the name o* the pattern instead o* *ocusing more on the actual pattern itsel*4 In this chapter5 /e /ill discuss di**erent types o* di'ergence4 Dach type o* di'ergence indicates that 'olume and price are not in alignment4 &i'ergence can 6e *ound /hen price is going up and 'olume is going do/n or it can 6e that 'olume is increasing and price is not4 In other /ords5 di'ergence is /hen something occurs in price that is not con*irmed in 'olume or /hen something occurs in 'olume that is not con*irmed 6y price4 et@s re'ie/ /hat /e should normally see in price and 'olume4 &i#ure -4( $pical Volume in Uptrend 5 sho/s that as price is increasing so is 'olume4 $his is /hat /e
epect in an uptrend4
Figure %3: Typical Volume in ptrend
oo)ing at the 'olume on the lo/s5 it is almost non8eistent5 meaning that sellers had no interest in ma)ing lo/s4 Buyers had control and continued to enter the mar)et
as price increased4 $his is a strong and healthy uptrend4 -o/e'er5 that can change at any moment4 "nd it does change on the net t/o 'olume 6ars4 In &i#ure 5( Diver#ence on %i#hs 5 the 'olume is decreasing as price is ma)ing ne/ highs4 $his is
/here traders tend to misinterpret di'ergence4 $he di'ergence appears and they thin) it signals a re'ersal in the mar)et4 Instead di'ergence is actually indicating a test *or sellers is needed5 not *orecasting a re'ersal o* trend direction4 $here*ore5 a 6etter approach is to /ait and see /hat the test *or sellers re'eals4
Figure &4: #i!ergence on -ighs
9o/ let@s re'ie/ /hat the di'ergence is actually telling us4 Buyers /ere strong in the mar)et4 $hey ha'e made ne/ highs4 -o/e'er5 as they too) prices higher5 the 6uyers did not continue to enter the mar)et /ith strength4 Instead5 /e see /ea)ness 6ecause the 'olume 6ars are shrin)ing5 not increasing as price goes up4 $he decrease in the 'olume 6ars indicates that ne/ 6uyers are hesitant a6out entering a*ter this su6stantial mo'e to the upside4 Instead5 the 6uyers opt to /ait and see i* there is a sell o** or retracement in price 6e*ore entering4 9o/ let@s proceed to see /hat actually happened4
&i#ure ,( Volume on the Lows in Uptrend sho/s the 'olume that occurred a*ter
the di'ergence in igure #4 Initially5 you may thin) that 'olume is di'erging or decreasing as it should on the lo/s4 -o/e'er5 it is not4 Volume /ent *rom non8eistent in &i#ure 5 to increasing on the lo/s in &i#ure ,4 9otice that a*ter price made the lo/ ;indicated 6y the red line<5 none o* the remaining 6ars made an additional lo/4 Instead5 price made lo/er highs and higher lo/s4 In other /ords5 price /ent into a congestion *ormation ;erratic highs and lo/s<4 "gain5 the trader needs to /ait *or con*irmation to see /hich /ay price /ill mo'e4
Figure &1: Volume on the )o$s in ptrend
9o/5 let@s loo) at ho/ this played out a*ter the *irst lo/4 &i#ure 3( Resumption of the $rend! has Points " 8 D mar)ed on the chart4 et@s slo/ly step through /hat
happened4
Figure &2:
'esumption of the
Trend
14
"t Point "5 price
made the *irst lo/ in the
retracement4 Volume5 /hen compared to the pre'ious lo/s in igure #5 /as increasing4 24 "t Point B5 price ma)es a ne/ lo/5 again on higher 'olume4 $his is not the /ay 'olume should act in an uptrend4 In an uptrend5 'olume should decrease on the lo/s4 -o/e'er5 price is not in a do/ntrend 6ecause the highs are not lo/er highs4 34 "t Point C5 price ma)es a ne/ lo/5 again on increasing 'olume4 $he 7uestion here is5 Is price changing direction? By loo)ing at the highs5 /e can esta6lish that a do/ntrend is not in place 6ecause price is not ma)ing lo/er highs4 Instead it is ma)ing e7ual highs4 #4
$hree 6ars later5 at Point &5 price ma)es a ne/ high on lo/er 'olume /hen compared to the pre'ious 'olume 6ar4 "t this point5 /e can identi*y t/o critical aspects: ;1< the uptrend has not 6een reesta6lished 6ecause although price is ma)ing higher highs5 it has not made a higher lo/ and ;2<5 'olume should increase as price ma)es a ne/ high as this indicates another test *or sellers is needed4 "gain5 /e /ait *or con*irmation o* a change in trend or a resumption o* the current trend4
%4 "t Point D5 price ma)es a higher lo/ on lo/er 'olume4 $his is the resumption o* the uptrend 6ecause /e are no/ ma)ing higher highs and higher lo/s and the 'olume on the lo/s is decreasing4 &i#ure -( Result of Resumption of the $rend 5 re'eals the resulting up/ards
mo'ement in price4 $he test *or sellers and resumption o* the trend too) a total o* thirty8 one 6ars to play out4 Using the )no/ledge o* an uptrend and understanding the 'olume 6eha'ior in an uptrend5 as /ell as at highs and lo/s5 allo/ed the trader to /ait until price and 'olume agreed 6e*ore entering5 there6y reducing their ris) and increasing the pro6a6ility *or a success*ul trade4
Figure &%: 'esult of 'esumption of the Trend
Be*ore proceeding5 let@s re'ie/ the 6asics o* /hat /e ha'e learned so *ar5 applying it to 6oth uptrends and do/ntrends: 14
"n uptrend consists o* higher highs and higher lo/s4
24 " do/ntrend consists o* lo/er lo/s and lo/er highs4
34
Congestion is an erratic series o* highs and lo/s4
#4
In an uptrend5 'olume should increase on the highs and decrease on the lo/s4
%4
In a do/ntrend5 'olume should increase on the lo/s and decrease on the highs4
(4
Volume is a non8directional indicator4 $his means that /hen price is ma)ing ne/ highs5 'olume should 6e increasing or /hen price is ma)ing lo/er lo/s5 'olume should 6e increasing4
+4
&i'ergence is /hen price and 'olume are not in agreement4
.4
When price ma)es a ne/ high on lo/er 'olume5 /e should epect a test *or sellers4
04
When 'olume increases on the lo/s in an uptrend5 /e must /ait *or a lo/er high to 6e esta6lished 6e*ore determining i* price has changed directions4 $hen /e must con*irm that 'olume is decreasing on the higher lo/s 6e*ore entering in the direction o* the prior uptrend4
14 When 'olume increases on the highs in a do/ntrend5 /e must /ait *or a higher lo/ to 6e esta6lished 6e*ore determining i* price has changed direction4 $hen /e must con*irm that 'olume is decreasing on the lo/er highs 6e*ore entering in the direction o* the prior do/ntrend4 9o/5 let@s o6ser'e /hat happens /hen a mar)et re'ersal occurs5 and changes the trend *rom up to do/n4 &i#ure ( Diver#ence at $op of 6arket 5 indicates that /e are ma)ing higher highs in price and lo/er highs in 'olume4 "ccording to /hat /e ha'e learned so *ar5 this means there /ill 6e a test *or sellers4
Figure &&: #i!ergence at Top of 9ar*et
We must no/ /ait to see /hat the seller@s test re'eals4 In &i#ure 0( Low on Increasin# Volume5 price has made a lo/ on increasing 'olume4 $hen5 price made a
lo/er high4 $his signaled additional /ea)ness in the uptrend4 We no/ dra/ lines o** the lo/er high and the lo/er lo/ and /ait to see /hat happens4
Figure &,: )o$ on Increasing Volume &i#ure '( $estin# Lows and %i#h5 sho/s that price comes 6ac) to test the lo/ on
decreasing 'olume4 Price should no/ go 6ac) to the lo/er high4 Price does go 6ac) to
the lo/er high on decreasing 'olume4 In other /ords5 6uying interest is decreasing as it approaches the lo/er high4
Figure &.: Testing )o$s and -igh
Price is not in congestion 6ecause the highs and lo/s are not erratic4 -o/e'er5 sellers are decreasing on the lo/s and 6uyers are decreasing on the lo/er highs4 "gain5 /aiting is the 6est option4 $hen5 in &i#ure )( 8ew Lower Low and Lower %i#h5 price ma)es a ne/ lo/ and sellers are starting to enter ;slo/ly<4 Price then ma)es a ne/ lo/er high5 esta6lishing a do/ntrend /ith 6uyers uninterested in ta)ing price up4
Figure &: ;e$
)o$er )o$ and )o$er -igh
Price then 6egins to mo'e do/n5 ma)ing lo/er lo/s and lo/er highs5 /ith increasing 'olume on the lo/s5
&i#ure 2( Lower
Lows on Increasin# Volume4
Figure &: )o$er )o$s on Increasing Volume
9otice that price made a lo/er high 6ut on increasing 'olume5 &i#ure 4( Increasin# Volume on Lower %i#hs 5 highlights this area4 $his can 6e con*using4 "*ter
all5 i* sellers are increasing /hy /ould 6uyers increase5 as /ell? Buyers did try to come in and ta)e price up5 the )ey is they *ailed4 $hey increased their e**orts5 6ut they /ere not re/arded *or their etra e**orts4 ellers immediately stepped 6ac) in and too) control4
Figure &3: Increasing Volume on )o$er -ighs
$his is 6ut one o* the /ays that a mar)et can re'erse4 In the net chapter5 /e /ill discuss the Wyc)o** pring and Upthrust patterns that also signal mar)et re'ersals4
Chapter . Wyc*off Spring and pthrust
Chapter .: Wyc*off Spring and pthrust
In this chapter5 /e /ill 6e discussing t/o patterns that /ere initially identi*ied and descri6ed 6y !ichard Wyc)o**5 the *ounding *ather o* 'olume analysis in the early 10s4 Ane is an upthrust and signals an uptrend re'ersal pattern4 $he other is a sprin# 5 a do/ntrend re'ersal pattern4 et@s 6egin /ith the upthrust4
While this can 6e a 'ery comple pattern5 I pre*er a simpler 'ersion4 Basically5 you ha'e an up/ard mo'ement in price that *orms an area o* resistance4 Price then goes 6ac) to test the resistance area on 'olume that is at least #G or greater5 /ithout a #G or greater mo'ement in price ;Wyc)o** used a %G threshold 6ut I ha'e *ound that #G /or)s >ust as /ell<4 &i#ure 05(
Upthrust Volume *attern 5 sho/s the
simplicity o* this pattern4
Figure ,4: pthrust Volume /attern
Point " indicates a high in price /ith the associated 'olume 6ar4 We etend a line out *rom the high o* the price 6ar and this is called the supply line4 "*ter a retracement5 price returns to the supply line mar)ed as Point B4 "s price returns to the supply line5
'olume increases su6stantially /hen compared to the 'olume at Point "4 -o/e'er5 e'en though the 'olume increased more than #G5 the actual price mo'ement5 in comparison5 /as not su6stantial4 $his indicates that although price made a high5 there /ere actually more sellers than 6uyers 6ecause5 i* all the 'olume /as actually 6uying 'olume5 then price /ould ha'e mo'ed up su6stantially a6o'e the supply line4 While &i#ure 05 sho/s the upthrust on a relati'ely short time*rame5 &i#ure 0,( Upthrust on Lon#er $erm Chart 5 sho/s t/o upthrust patterns on a longer term chart4 "t
Point "5 the supply line is identi*ied4 Price retraces and returns to the supply line /ith a #G increase in 'olume4 Price *ails to mo'e #G higher resulting in a do/n/ard mo'ement4 "t Point C5 again5 price comes 6ac) to the supply line on e'en higher 'olume and5 again5 there is not su**icient re/ard *or the e**ort sho/n in the 'olume so price drops4
Figure ,1: pthrust on )onger Term Chart
With the ad'ances in technology5 and the *act that traders can no/ trade 'ery small time*rames5 these patterns are easily identi*ia6le on the smaller time*rames4 $he only
di**erence is the distance 6et/een the initial supply line that is esta6lished and the actual test o* the supply line4 An smaller time*rames5 there is less distance 6et/een the high that esta6lishes the supply line and the e'entual test o* the supply line ;considered the testing area<4 $he larger the time*rame the more distance 6et/een the testing areas4 Bac) in the 10s5 /hen Wyc)o** /as trading5 they did not ha'e instantaneous access to 'olume as /e do today so Wyc)o** used the upthrust pattern to identi*y the end o* an uptrend 6ut5 it can also 6e used to identi*y entries into an eisting do/ntrend4 or eample5 in &i#ure 03( Upthrust in a Downtrend 5 the mar)et had 6een mo'ing lo/er and a high /as made at point "4 $hen price returned to test the same area at point B4 "lthough the 'olume at Point B is greater than #G in comparison to the 'olume at Point "5 there /as no su6stantial increase in price4 $here*ore5 sellers /ere actually entering at Point B5 as e'idenced 6y the lac) o* price mo'ement in relation to the 'olume increase4 $hen price returns to the same supply line at point C on 'olume that is also greater than the 'olume o* point " ;supply line high<4 "gain5 there is no su6stantial increase in highs and price *alls4 Instead o* assigning the pattern only to the end o* an uptrend5 /e are loo)ing *urther into the in*ormation that is gi'en /ith the pattern4 In each o* the tests in &i#ure 03 5 there /as an increase o* greater than #G in 'olume acti'ity4 $here*ore5 i* this is truly 6uying 'olume then price should ha'e increased *rom the high at point " to the high o* point B 6y a distance o* at least #G5 ho/e'er5 it did not do so4 $here*ore5 /e can assume that most o* the 'olume /ithin the 6ar is actually selling 'olume5 /hich is /hy the 6uyers recei'ed no re/ard *or their e**orts4
Figure ,2:
pthrust in a #o$ntrend
Be*ore /e mo'e on to re'ie/ the upthrust pattern:
identi*ying
14
Price ma)es a high4 We call this the supply line4
24
Price retraces o** the high and mo'es do/n4
34 #4
a
sprin#!
let@s
Price comes 6ac) to the supply line on an increase o* 'olume that is at least #G greater than the high that *ormed the supply line4 Price closes 6elo/ the supply line4
9o/5 let@s loo) at /hat a sprin# is and /hat it tells us4 $he pring pattern /as also de'eloped 6y !ichard Wyc)o** as a signal to the end o* a do/ntrend4 $he pring *ormation can present in t/o di**erent *ormations5 ho/e'er5 I /ill only discuss the easiest and most common *ormation in this 6oo)4 $he most common *ormation is /hen price ma)es a lo/5 retraces5 and then returns to test the same area4 Price /ill ma)e a ne/ lo/ 6ut does so on decreasing 'olume sho/ing that sellers are no longer interested in ma)ing lo/er prices4
or eample5 in &i#ure 0-( 9ckoff Sprin#
&ormation on Lows 5 price made a lo/5 retraced5 and then came 6ac) to test the lo/4 "s
price came 6ac) to test the lo/5 it did so on decreasing 'olume5 sho/ing a lac) o* interest 6y the sellers to ta)e prices lo/er4
Figure ,%: Wyc*off
Spring Formation on
)o$s
9otice in igure %35 /hen price came 6ac) to test the lo/5 it 6ro)e the support line and then closed a6o'e the support line5 indicating that the support line /as holding price up4 &i#ure 0( 9ckoff Sprin# Close +elow Support 5 sho/s an eample o* /here price *orms a support line at Point " and then price actually closes 6elo/ the support line at Point B4 "*ter 6rea)ing the support line5 price retraces and comes 6ac) to test the support line a second time at Point C4 Both are accepta6le4
Figure ,&: Wyc*off Spring Close 0elo$ Support
et@s re'ie/ the *ormation o* the pring: 14
Price ma)es a lo/4 We call this the support line4
24
Price retraces o** the lo/ and mo'es up4
34
Price comes 6ac) to the support line5 on decreasing 'olume4
#4
Price closes a6o'e the support line4
Com6ining the po/er o* di'ergence /ith these *ormations can 6e a 'ery po/er*ul s)ill *or traders4 or eample5 in &i#ure 00( Ran#e +ound $radin# Usin# Diver#ence and Sprin#s5 price *ormed a resistance line at Point "4 Price then retraced slightly5 only
to return to the resistance area at Point B4 "s price made a ne/ high and closed under the resistance line5 'olume decreased4 Price then *ormed a ne/ lo/ at Point C4 $he ne/ lo/ is a potential support line4 Price returned again to the area o* resistance at Point & and made a higher high than Point " 5 on decreasing 'olume4 Price then /ent to test the support line and made a ne/ lo/ closing a6o'e the support line at Point D on
decreasing 'olume4 Price retraced to the upside and came 6ac) to test the support line a second time at Point on decreasing 'olume4 Price then retraced to the upside4
Figure ,,: 'ange 0ound Trading sing #i!ergence and Springs
In the net t/o chapters5 /e /ill epand on using the 'olume *ormations /ith a trading plan5 either 6y incorporating the $-& indicators or 6y simply identi*ying a Wyc)o** pring *ormation to signal an end o* a do/ntrend or to signal a potential entry into an uptrend4
Chapter Incorporating Volume in
Chapter : Incorporating Volume in
Indicators
Ane o* the issues /ith using 'olume and di'ergence is that5 although the 'olume patterns gi'e an ecellent indication o* a potential retracement5 it lea'es the trader 7uestioning /here /ill price retrace to?4 $he ans/er lies in incorporating the $-& indicators4 $he $-& indicators pro>ect /here price /ill go4 or eample5 i* the $-& "&H ;"'erage &irectional Inde< ma)es a magenta pea) ;/hen the $-& "&H is greater than % and ma)es a pointed top /ith a magenta dot or is greater than +<5 then /e )no/ to epect a retracement4 $ypically5 the retracement /ill 6egin a*ter a 'olume di'ergence4 Ance the retracement 6egins5 /e )no/ to anticipate price retracing to the $-& "$! stop ;"'erage $rue !ange<4 $here*ore5 /e can identi*y the potential pro*it opportunity 6y calculating /here price currently is in relation to the $-& "$! stop4 By incorporating the po/er o* 'olume analysis5 /ith the pro>ection po/er o* the $-& indicators5 the trader can identi*y /hen price /ill retrace5 identi*y i* 6uyers or sellers are /ea)5 and then enter a trade 6ased on this /ea)ness or lac) o* /ea)ness5 as the case may 6e4 or eample5 &i#ure 0'( :old )35 6inute Chart sho/s the $-& "$! top5 $-& Volume and $-& "&H4 "t the 6eginning o* the chart5 price is mo'ing up/ards4 "t Point "5 price ma)es a high5 on higher 'olume5 /ith the $-& "&H increasing4 "s the $-& "&H line approaches + ;red line<5 price is testing the pre'ious high ;actually eceeding it 6y a *e/ tic)s< on lo/er 'olume ;Point B<4 $his is an indication to loo) *or a potential "&H magenta pea) ;a pointed top /ith a magenta dot<4 Using 'olume analysis
alone5 the trader does not )no/ /here price /ill retrace to4 -o/e'er5 6y incorporating the $-& "$! stop5 /e )no/ to anticipate a retracement to the plus sign ;<4
Figure ,.: =old 24 9inute Chart
We can ta)e this one step *urther 6y calculating our potential pro*it area4 $he $-& "&H magenta pea) came in at approimately 1((044 $he $-& "$! stop5 at that time5 /as 1(#3434 $hat gi'es us a potential pro*it area o* t/enty8si points or t/o hundred and sity tic)s4 But /hat i* price does not retrace all the /ay to the "$! stop or5 as /ill happen5 the "$! stop mo'es up /ith price? or this reason5 /e incorporate multiple time*rames4 By going do/n in time5 /e can con*irm that price and 'olume are doing eactly as /e anticipate5 there6y con*irming /hat the higher time*rames are indicating4 &i#ure 0)( :old 0 6inute Chart 5 sho/s the "$! stop has changed *rom 6lue to
red5 indicating a potential mo'e to the do/nside4 $he $-& "&H is also con*irming the trade as the "&H line is red4 Price does mo'e do/n and then 6egins to retrace a*ter a magenta pea) on the "&H4 We simply /ait *or price to retrace to the "$! stop on the
#% minute chart ;Point "<5 on 'olume di'ergence ;Point B<5 and then enter the trade at the open o* the net 6ar4 ince our trade initiated at the "$! stop5 /e are guaranteed entry at the lo/est point o* ris)4
Figure ,: =old &, 9inute Chart
Ance /e enter the trade5 /e use the $-& Clipper to determine our stop and automatic pro*its targets 6ased on a ris) to re/ard o* 1:24 $his means that *or e'ery dollar o* ris)5 /e are anticipating a re/ard o* t/o dollars4 $he price at entry /as the close o* the 6ar that *ormed di'ergence and touched the "$! stop at 1(+%4% ;Point "<4 $he Clipper determined the stop to 6e 1(++4 ;1 tic)s o** the high o* the 6ar< or *i*teen tic)s *rom entry ;Point B<4 "s you can see *rom &i#ure 02( :old $rade 1ne5 Clipper 1 at 1(+24% ;Point C<5 Clipper 2 at 1((04% ;Point &< and Clipper 3 at 1(((4% ;Point D< /ere all achie'ed resulting in a re/ard o* eighteen points /hile only ris)ing *our and a hal* points4 $he total ris) to re/ard on this trade /as one to *our4
Figure ,: =old > Trade 6ne
hortly a*ter our eit5 the "&H made another magenta pea) and price started up/ard4 -o/e'er5 in this case5 6uyers did not enter the mar)et4 !emem6er the anticipated 'olume 6eha'ior *or do/ntrends 88 'olume /ill decrease on the highs4 I* /e compare the current high ;a*ter the second magenta pea)< /ith the high at the "$!5 /e can see that 6uyers indeed decreased ;in other /ords5 there /ere no 6uyers entering the mar)et<4 $he net price 6ar closed in the direction o* the trend ;do/n< and the "&H /ent *lat4 We entered a short position again5 using a *i*teen tic) stop5 gi'ing us a total ris)5 again5 o* *our and a hal* points4 "gain5 as sho/n in &i#ure 04( :old $rade $wo5 the trade results in capturing Clipper 1 at 1((%415 Clipper 2 at 1((2415 and Clipper 3 at 1(%0415 resulting in a re/ard o* eighteen points4
Figure ,3: =old
Trade T$o
"*ter our eit on the second trade5 another magenta pea) appears4 Is there a possi6ility o* yet another trade? We ha'e to monitor the 'olume *or clues4 &i#ure '5( Volume Comparison in Downtrend 5 /e see that at Point "5 price made a high on lo/er
'olume5 indicating 6uyers /ere no longer interested4 $his /as our *irst short trade4 $hen at Point B5 price made a high 6ut 6uyers /ere not interested as e'idenced 6y the 'olume not increasing4 In *act5 it /as 6arely 'isi6le4 $his is typical 'olume 6eha'ior in a do/ntrend4 $he net 6ar con*irmed sellers returning ;the 6ar closed do/n ;close /as less than open< and that generated a second short entry<4 9o/ let@s analy=e /hat happened at Point C4 Price made a high and closed do/n4 Is this the same setup as in trade t/o? 9o4 !emem6er at Point B5 /e compared the 'olume to the high at Point "5 and 'olume con*irmed the do/ntrend ;decreasing on the highs<4 -o/e'er5 this time i* /e compare the 'olume at Point C /ith the 'olume at Point B5 6uyers are increasing4 $his is not typical do/ntrend 6eha'ior on the highs since 'olume should 6e decreasing on the highs4 $here*ore5 /e /ait4 "t Point &5 price ma)es a higher lo/4 "gain5 this is not typical price 6eha'ior in a do/ntrend as price should 6e ma)ing lo/er lo/s4 We /ait *or price to retrace to the "$! stop4 "s price pulls 6ac) to the "$!5 it does so on increasing 'olume and5 there*ore5 indicates that there is no entry4 ;!emem6er5 /hen
there is a gray 'olume 6ar you loo) to the close o* the 6ar4 $he corresponding price 6ar *or the gray 'olume 6ar closed on the lo/ and there*ore should 6e interpreted as a sellers 6ar4<
Figure .4: Volume Comparison in #o$ntrend
In summary5 /e /ere a6le to identi*y /hen price /ould 6egin a retracement on the +2 minute chart5 /here the retracement /ould li)ely end5 and /hat the pro*it potential o* the mo'e /ill 6e ;t/o hundred and sity tic)s<4 By going do/n in time5 /e /ere a6le to limit our ris) to *our and a hal* points per trade and each trade captured eighteen points ;one hundred and eighty tic)s<4
Chapter Incorporating Volume youre your Trading /lan $ithout the T-# Indicators
Chapter :
Incorporating Volume into
or those readers /ho do not use the $-& indicators5 I ha'e elected to design a plan that incorporates the Wyc)o** pring5 as I 6elie'e this is one o* the easiest 'olume patterns to recogni=e4 "lthough Wyc)o** used the spring *ormation *or identi*ying the end o* a do/ntrend5 I ha'e elected to use this *ormation *or entry at the end o* a trend and /ithin an uptrend4 &i#ure ',( 8asda; ,5 6inute Chart 5 sho/s that the 9asda7 /as in a do/ntrend
*or the month o* Fay 2124 Price made a lo/ on Fay 1.5 212 ;Point "< and price 6egan a retracement on the Wyc)o** pring *ormed4
net 6ar4 "t Point B5 a
Figure .1: ;asda@ 1&&4 9inute Chart
Be*ore /e continue5 let@s again re'ie/ the *ormation o* a Wyc)o** pring: 14
Price ma)es a lo/4 We call this the support line4
24
Price retraces o** the lo/ and mo'es up4
34
Price comes 6ac) to the support line5 on decreasing 'olume4
#4
Price closes a6o'e the support line4
ince price closes a6o'e the support line5 this generates an entry into a potential uptrend4 Using 6asic money management /ith a ris) to re/ard ratio o* 1:2 ;one dollar o* ris) *or e'ery t/o dollars o* re/ard<5 /e calculate our eit point4 &i#ure '3( +asic Entr 9ith Stops and *rofit $ar#ets sho/s the stop /ould 6e placed at 2#24
;6asically one point o** the lo/ *ormed at Point B in igure (2< and the ris) /ould 6e thirty8eight and one 7uarter points per contract4 By dou6ling the ris)5 /e identi*y pro*it targets at 2%3#4+%5 2(1142%5 and 2(.+4+% *rom entry4 Dach pro*it target /as achie'ed5 and resulted in a total pro*it o* *our hundred *i*ty8nine points5 /hile only ris)ing a total o* one hundred *ourteen and three 7uarter points4 $his trade ga'e us a ris) to re/ard o* one to *our4
Figure .2: 0asic +ntry With Stops and /rofit Targets
What i* you missed the *irst entry? &i#ure '-( 7dditional Entries for 8asda; sho/s an additional t/o entries using the 'olume analysis concepts pre'ious discussed4 "t Point C5 again a Wyc)o** pring de'elops indicating a long entry into the uptrend4 ince price closes a6o'e the support line5 an entry is again indicated4 $hen at Point &5 /e ha'e a re'ersal 6ar *ormation /here the close o* Point & is a6o'e the high o* the pre'ious 6ar5 /hich had *ormed an isolated lo/4 "dditionally5 /hen the isolated lo/ /as *ormed5 'olume /as decreasing5 /hich is anticipated in an uptrend4 "gain5 I /ould recommend setting the stop at least one point o** the lo/ and then dou6ling the ris) *or each pro*it target4
Figure .%:
8dditional +ntries for ;asda@
In addition to using pro*it targets that incorporate ris) to re/ard5 a trailing stop that is set one or more points o** any su6se7uent higher lo/s5 could also 6e incorporated to protect pro*its /hile in the trade4
Chapter 3 Volume Versus Tic* Count
Chapter 3: Volume Versus Tic* Count
$his 6oo) /ould not 6e complete /ithout a discussion o* 'olume 'ersus tic) count4 "s /e learned earlier5 'olume is the num6er o* contracts 6ought or sold4 An the other hand5 tic) count is the num6er o* times price changes4 " single tic) is a single change in price4 o i* price mo'ed *rom 14 to 141 6ac) to 14 then to 142%5 that is three tic)s or three changes in price4 $he missing in*ormation is the num6er o* contracts that /ere traded at each price le'el4 -o/e'er5 /hen trading the spot *ore mar)et5 since there is no central echange5 and tic) count is the only option *or traders4 irst5 let@s loo) at an eample o* each *or comparison4 &i#ure '( Euro $rade Volume sho/s a 3 minute price chart o* the Duro Currency uture using actual $rade Volume and &i#ure '0( Euro $ick Count sho/s a 3 minute price chart o* the Duro Currency uture using tic) count4
Figure .&: +uro Trade Volume
Figure .,: +uro Tic* Count "t *irst glance 6oth images loo) the same4 -o/e'er5 let@s actually compare the di**erences4 &i#ure ''( Euro $rade Volume *attern sho/s a red line /here 0 contracts /ere traded and three di**erent 'olume patterns5 Point "5 Point B5 and Point C4 "t Point "5 /e see that price made a lo/ and then later made a higher lo/ on lo/er 'olume4 $his is typical price and 'olume 6eha'ior in a trend4 $hen at Point B5 price made a high5 and a*ter ma)ing a higher lo/5 continued up to ma)e a higher high4 -o/e'er5 at the last high /e ha'e 'olume di'ergence indicating there /as /ea)ness in the trend and there must 6e a test *or sellers4 An the test *or sellers5 Point C5 instead o* a decrease in sellers5 /e ha'e an increase in sellers4 $his is the *irst sign that the trend may 6e changing4
Figure ..: +uro Trade Volume /attern 9o/ let@s compare the points in igure (( to same points in &i#ure ')( Euro $ick Count Volume *attern4 $he *irst thing that stands out is that the tic) count 'olume ne'er reached the red line4 ince /e already )no/ that tic) count is only the measurement o* price changes and not actual contracts traded5 this /ould 6e anticipated4 -o/e'er5 notice that at Point " in igure ((5 there /as a decrease in selling 'olume ;normal trend
6eha'ior< 6ut in igure (+5 6elo/5 instead o* a decrease there /ere an e7ual num6er o* sellers at those points4 Well5 /e could change our 'olume 6eha'ior patterns to include 'olume 6ars that are e7ual to4 et@s mo'e on to Point B4 Buyers increased on the *irst high and slightly decreased on the second high4 While this /as 'ery 'isual in igure ((5 it /as 'ery small in igure (+4 In *act5 in igure (( there /as a di**erence o* 202 contracts5 /hile in igure (+ there /as a di**erence o* only (14 "gain5 /e could simply notate these di**erence and /atch more closely5 )no/ing that e'en a small di**erence in the 'olume could ha'e signi*icant impact on price4
Figure .: +uro Tic* Count Volume /attern
9o/5 let@s compare Point C on 6oth charts4 In igure ((5 at Point C5 selling 'olume /as increasing5 indicating that sellers /ere 6eginning to ta)e interest in lo/ering prices4 -o/e'er5 in igure (+5 at Point C5 /e ha'e a su6stantial di'ergence as price /as ma)ing lo/s4 Was there a su6stantial di**erence in the num6ers? In igure ((5 at the *irst red 6ar at Point C5 there /ere 0. contracts sold and at second red 6ar there /ere 00+ contracts sold4 $his is a di**erence o* 1+ contracts4 In igure (+5 at the *irst red 6ar in Point C5 the 'olume5 using tic) count5 /as %+0 and at the second red 6ar the 'olume5 using tic) count5 /as #((4 $his is a di**erence o* 81134 9o/5 the most important 7uestion is:8JWould this ma)e a di**erence in trading? In igure ((5 there /as no trade entry at Point C4 In igure (+5 there /as a trade entry at Point C5 6ut you more than li)ely /ould ha'e 6een stopped out4 o yes5 there /ould 6e a di**erence in using trading 'olume and using tic) count4 "s /e learned at the 6eginning o* this chapter5 tic) count is primarily used *or the pot ore mar)ets4 $here is no /ay to accurately say ho/ e**icient tic) count is on the pot ore mar)et 6ecause /e only ha'e
access to tic) count *or 'olume4 -o/e'er5 since the release o* Currency utures5 /e can no/ compare the Currency uture contract to the pot ore sym6ol to get a general idea4 ;ince the si ma>or currency *uture sym6ols are measured against the U &ollar5 the comparison can only 6e per*ormed 6et/een currency *utures contracts and spot currenc y /here U& is listed as the s econd currency sym6ol5 i4e4 LBPU&5 DU!U&5 "U&U&4< &i#ure '2( $hree 6inute +ritish *ound Currenc &uture < $rade Volume and &i#ure '4( $hree 6inute :+*USD Spot Sm"ol < $ick Count show the similarities and differences "etween the two.
Figure .: Three 9inute 0ritish /ound Currency Future > Trade Volume
Figure .3: Three
9inute =0/S# Spot
Symbol > Tic* Count irst5 although one is the currency *uture and one is the spot sym6ol5 the actual price 6ars and patterns loo) almost identical4 -o/e'er5 due to the *i*th digit in price on the spot sym6ol5 there are more 'olume 6ars to read4 ;or traders that do not understand the *i*th digit5 spot sym6ols ha'e *i'e decimal points /hile currency *uture contracts only ha'e *our decimal points4 $his means that /ith the currency *uture contract5 price mo'es *rom 4 to 414 -o/e'er5 on the spot currency sym6ol5 price mo'es *rom 4 to 414< $here are many di**erences 6et/een the 'olume patterns on the t/o charts4 ets eamine the t/o patterns that are most e'ident4 igure + and igure +1 6oth illustrate the same price patterns4 Ane5 Point "5 is o** the highs and the second one5 Point B5 is o** the lo/s4
Figure 4: 0ritish /ound Currency Future > Volume /attern
Figure 1: =0/S#
> Volume /attern
"s you can see on igure +5 at the second cyan 6lue 'olume 6ar there is a 'ery large di'ergence indicating that price /ill go do/n and test *or sellers4 -o/e'er5 in igure +15 the di'ergence is minimal4 $hen at Point B in igure +5 on the second red 6ar5 there /as #G more selling 'olume /ith 'ery little re/ard *or the sellers4 -o/e'er5 in igure +15 the di'ergence /as di**erent ;'olume /as not #G greater< and it /as minimal4 "gain5 depending on ho/ closely you /ere monitoring the 'olume5 6oth di'ergences in igure +1 could ha'e slipped 6y4 $he net 7uestion /ould 6e5 at Point B5 /as the di'ergence signi*icant? ,es5 as sho/n in igure +25 the di'ergence *rom Point B5 predicted the up/ard mo'ement in price4 "nd the net 7uestion /ould 6e5 /ould the di'ergence ha'e an impact in your trading? $his is an easy 7uestion /ith no easy ans/er 6ecause it is dependent on your trading plan and /here you are in the trade4 or eample5 i* you /ere in the trade5 and the *irst t/o pro*it targets /ere achie'ed5 then the di'ergence /ould ha'e 6een a trigger *or an eit or a signal to ha'e at least lo/ered your stop4 Ather traders could ha'e interpreted the 'olume as a 6rea)out o* the small congestion area and /ere immediately under/ater in the trade /ith a potential o* 6eing stopped out4
Figure
2: 'esult of
#i!ergence
from /oint 0
Ane additional concept to discuss is the use o* tic) charts /ith 'olume4 $raders use tic) charts to ta)e noise out o* their charts4 Instead o* loo)ing at ho/ price mo'es during a speci*ied period o* time5 they opt to measure the num6er o* price changes4 $here*ore5 6e*ore /e discuss the reading 'olume on a tic) chart5 let@s understand ho/ a tic) chart is 6uilt4 !emem6er tic)s are the num6er o* changes in price4 When using a tic) chart5 the chart is 6uilt using the num6er o* changes in price4 $here*ore5 a %# tic) chart o* the 9asda7 is displayed 6ased on each price 6ar 6eing representati'e o* %# price mo'ements 88 there is no correlation to time4 In other /ords5 it may ta)e one minute or ten minutes to 6uild a complete price 6ar that is representati'e o* %# price mo'ements4 In my opinion5 there are a couple o* issues /ith tic) charts and 'olume4 ome pro*essionals say that tic) count is at least .G as accurate as true 'olume4 I* this is the case5 then you are actually 6uilding a price chart 6ased on 'olume5 since tic) count is as accurate as 'olume4 "lso5 /hen using tic) charts5 you are limiting the 'olume to a speci*ied num6er o* price mo'ements ;/hich is correlated /ith 'olume 6ecause 'olume is /hat creates the changes in price<4 ince /e cannot compare a tic) chart to a minute chart ;remem6er tic)s charts are 6uilt independent o* time<5 then /e can only loo) at /hat the tic) chart demonstrates and see i* the 'olume patterns are the same4 &i#ure )-( 8asda; 05 $ick Chart sho/s they are not4 "t Point "5 price ma)es a high4 $he su6se7uent high is e7ual to the pre'ious high on the 'olume 6ars4 $his is not di'ergence 6y de*inition5 ho/e'er5 price did retrace4 "t Point B5 price made a lo/ and the su6se7uent lo/ indicated di'ergence4 We should no/ 6e epecting a test *or 6uyers4 $he test did occur 6ut it /as on increasing 'olume on the high ;*irst gray 6ar<4
$his /ould not 6e typical 'olume 6eha'ior *or a do/ntrend as 'olume should decrease on the highs4 $hen5 price ma)es lo/er lo/s on di'erging 'olume and /e are epecting another test *or 6uyers4 "t Point C5 /e did ha'e di'erging 'olume on the highs and could ha'e entered a short position4 -o/e'er5 /e /ould ha'e then 6een stopped out 6y Point D5 /hen price 6egan ma)ings highs on 'olume that /as greater or e7ual to pre'ious high 'olume4 Perhaps5 a trader /ould ha'e noticed that price /as ma)ing higher lo/s at Point &5 /ith a 'olume greater than #G /ith no re/ard *or sellers5 and /ent long5 only to 6e stopped out later4 In other /ords5 di'ergence is not accurate on tic) charts 6ecause you are measuring the num6er o* price changes and the num6er o* contracts it ta)es to ma)e the speci*ied price changes instead o* measuring the num6er o* contracts that it ta)es to ma)e a high /ithin a speci*ied time period4
Figure %: ;asda@ ,&4 Tic* Chart
IndeA
IndeA
12
A "&H
63, 64, 66
"$!
31, 63, 64, 65, 66, 68
B 6uyers
4, 5, 6, 7, 8, 13, 14, 17, 20, 28, 33, 34, 36, 39, 40, 41, 45, 51, 52, 56, 57, 63, 66, 67
C counter8trend
39
D di'ergence
28, 33, 44, 45, 46, 60, 63, 64, 65 27
di'erging 'olume Do/i +ar do/ntrend
17, 18 5, 27, 39, 40, 47, 48, 49, 51, 55, 57, 58, 61, 67, 70
E 16, 17
En#ulfin# *attern
H 8, 9, 10, 12, 13, 14, 15, 16, 20, 21, 27, 29, 31, 33, 34, 35, 36, 39, 40, 41, 47, 49, 50, 51,
hi#h
52, 55, 57, 58, 60, 63, 65, 66, 67, 72 4, 39, 47, 48, 49
higher highs
I inside 6ar
8, 20
Inside Bar
20, 21
Isolated %i#h
13
Isolated Low
14, 15
L low
7, 8, 9, 10, 12, 14, 15, 16, 17, 20, 21, 27, 31, 35, 36, 39, 40, 41, 46, 47, 48, 49, 50, 51, 58,
59, 60, 68, 70, 71, 72
lo/er lo/s
4, 28, 39, 40, 48, 49, 52, 68
N ne/ highs
4, 40, 45, 49
O 1utside +ar
19, 20
R resistance retracement re/ard ris) to re/ard
29, 31, 32, 33, 34, 35, 36, 37, 55, 60 21, 26, 39, 41, 46, 47, 55, 63, 68, 70 7, 29, 56, 57, 65, 66, 71, 72 65, 71
S 4, 5, 6, 7, 8, 13, 14, 17, 20, 28, 33, 35, 36, 39, 40, 41, 45, 47, 48, 49, 51, 52, 56, 57, 58,
sellers 63, 67
55, 58, 70
sprin#
55, 56, 57, 58
supply line
31, 34, 35, 59, 60
upport
59, 60, 71, 72
support line
T 14, 15
three 6ar re'ersal tic)
17, 66, 74, 76, 77, 80, 81 57, 64
time*rames
61
trading plan trend
21, 26, 39, 42, 45, 47, 48, 49, 66, 70
U upthrust
55, 56, 57, 58
uptrend
5, 27, 39, 41, 44, 45, 47, 48, 49, 50, 55, 57, 61, 70, 71, 72
V 'olume
4, 5, 7, 8, 9, 10, 27, 28, 29, 32, 33, 34, 35, 36, 37, 39, 40, 41, 42, 44, 45, 46, 47, 48, 49,
50, 51, 52, 55, 56, 57, 58, 60, 61, 63, 64, 66, 67, 70, 71, 72
'olume analysis
8, 63
W /ea)ness Wyc)o**
7, 35, 37, 45, 50, 63 53, 55, 57, 58, 59, 60, 61, 70, 71, 72
12
