Price and Volume Analysis
Volume creates the price...

Turn up the Volume


It's been stated that every thing you need to know is in the price, the fuel of price is volume. Consider volume as tide rising and falling. And, not being dumped by the small waves bouncing off the shore in the rising tide. Reading the volume is like knowing when its high tide. 

This makes price and volume the two main indicators in trading. Late authors such as Wyckoff and Gann understood this very clearly. Today we call it the lost art of tape reading – reading raw data of price and volume offers the fastest and clearest understanding of what is really happening in a market. Further along in time Granville, Williams and Chaikin have added creatively to price and volume via new indicators based on the five aspects of raw data (high, low, open, close and volume) – essentially just another way to view the same things, such as divergence. Another problem with indicators is that most of them are lagging and can appear at times quite illusionary whereas reading the volume can assist your trading decisions more accurately.

The two basic rules for reading the market
1) Comparing one volume bar to the previous volume bar.
2) The relationship between the current volume bar and the current price bar, including open, high, low, close and range of price bar. 

Figure A.

 

Volume analysis assists in identifying strengths and weaknesses within price structure. Perhaps in a simple trend, price and volume will rise and fall together, however when this is not true then we can expect the main trend direction to change as shown in Figure B.

Figure B.


There is also the factor of divergence, that is, price moving up as the volume decreases, essentially your friend-trend has ended and this is easy to see as it unfolds and of course indicators will point this out much later in the game, as shown in Figure C.

Figure C.


We can read the market with price and volume in all time frames. I use it for day trading in two and five minute bars as well as daily, weekly and monthly.

We often find large volume at the tops and bottoms of market trends and this is easy to see – depending on the type of trend and market.

Profit taking, or in derivatives both shorts and longs, are being squeezed out of their positions, and so the market will run on high volume for a short period. If the trend has been steady and building interest over time, then profit taking comes into play. There is a buyer and seller for each transaction, so there are always equal buyers and sellers. If there are more potential buyers lining up, they will push prices higher until there are no more buyers when the market then rebalances and the same applies to the down side. It’s who has control in your trading time frame that matters.

A weekly chart on BSL is a reasonable chart to view volume that has excess volume at highs and lows, it is important to understand this, because this is where stops should be placed, that is, under the volume. When you see excessive volume, maybe into new highs or at Trading Levels  they are excellent entry points, strong volume after a correction is also a great entry signal as correction especially sideways corrections have low volume followed by a spike in volume, that’s where entry and initial stop is placed.

A normal looking trend will have price and volume increasing, and price and volume decreasing during the correction. Volume decreases until there are no more sellers and this is  an opportunity to buy. The positive bar/candle will then come into play followed much later by other indicators. If however there is increasing volume during the correction this shows that the sellers have taken control.

Each price bar and volume bar informs us of the market condition in an unfolding story. Lets take a look at Figure D. below.

Figure D.

 


We can see that the volume increases as the market moves up, with volume decreasing as the market moves down. The open and the closing of a bar is also very important as it shows us when change of control is taking place. The other factor is the range of the price bar in relation to the volume bar. In Figure D. the 3rd bar in from the left shows a change of trend. See if you can work out what is happening with each bar – is the closing higher than the opening, what is the price bar range, what is the volume doing? The 4th bar closes lower but the volume decreases, so there is no need for concern, it’s normal. The 5th bar is where the bulls are soaking up any bears that are left and the then market moves up on increasing volume.  See if you can work out the rest of the trend.

Market Depth

Market depth can best be understood as a set of scales weighted to the most powerful – either buyer or seller.Taking CBA as an example, market depth total on Tue March 7 day of writing this article: 118 buyers for 139,553 shares, 253 sellers with 269,946 shares. Sellers are in control! Market depth can also show us where the support and resistance is within the market, that is, the wholesale money. Where the largest orders are sitting on both sides of the depth is important, as the market will gravitate towards the wholesale money. An important indication for placing entries, exits and stops. Using the totals in the depth is an easy way to see who has control. The course of sales, and trade analysis of how many trades/volume are completed at a particular price, is also important showing a larger picture of support and resistance – seen visually as a bell curve.

Open Interest

Open Interest volume normally applies to the futures market upon which the Aussie 200 is based. The futures market SPI which is based of the ASX 200 Index trades approximately 30,000 contracts on a medium day and 40,000 contracts on a large day with current Open Interest around 250,000+ contracts. Open Interest adds both short and long contracts, Open Interest increases when a new contract is created and decreases when contracts are closed. A rising Open Interest demonstrates that bulls are confident enough to enter into contracts with bears, who are equally confident in their bearishness to enter into the position. There is much more to price, volume, open interest and market depth than this short article offers, however the topic is a beneficial part of market analysis and should be researched.

 

Price and volume analysis is a critical element of technical analysis that is overlooked or not clearly understood. It’s the driving catalyst for price movement, it creates the price and used in conjunction with the TradingLevels taught by TradingLounge will give the trader the confidence when analysing or trading, 

EXAMPLE Reading the volume on the BHP weekly chart