A short lesson in volume price analysis

Question

Anna,
To begin I would like to thank you for your very informative books. I have read For ex for beggingers and am currently reading VPA. Great books I must say. But I’m having trouble understanding something I’m seeing on my MT4 feeds regarding price action and volume. I understand the concepts of when a bullish volume bar represents a bullish candle or v.v. what I’m having trouble with is when I see a bullish cancel with a bearish volume bar or v.v. what does this mean? Take today at the end of the USD/JPY session. On both feeds from MT4 and Trade Interceptor I see a very large bullish volume bar with a corresponding small bearish candle. I’ve thumb through your book on VPA and didn’t see any explanation regarding this anamomly. Can you explain what is happening? I have taken some bad trades due to this set up and want to make sure I’m not missing something. At first I thought it was my choice of colors for volume vs cancel bars. But I have reloaded the MT4 app a couple of times, not changing any of the settings,and I am still seeing the same pattern. I also see it in my Trade Intercepted platform as well. Just hoping you can enlighten me to what I’m missing. Thank you for your time and your help. 
Terrell

Answer

Hi  –  first of all many apologies for the delay in replying, but your email ended up in my spam folder and I have only just discovered it as I was clearing it out – so many apologies. Thank you so much for investing in my books and thank you too for your very kind comments which are much appreciated, and I will do my best to answer your question if I can.

If perhaps I could start with the basics of volume price analysis, I think this may help to clarify things for you, and the starting point as always is in what we are looking for in this approach, which is either a confirmation or an anomaly. If the volume confirms the price action then this is fine and we know the move is genuine. If the volume contradicts the price action, then we know we have an anomaly, and if we start with single candles, a wide spread up candle with high volume is confirmation of a genuine move, whilst a wide spread down candle, again with high volume, is also confirmation of a genuine move. Volume is confirming the price action and the price action is confirming the volume. After all, if the market moves confidently higher or lower in the session, then this takes effort, and effort is reflected in the associated volume bar, so we know the move is genuine. Equally a narrow spread candle ( either up or down ) associated with low volume is also valid. After all, we do not expect to see a small price move associated with high volume, as this would be an anomaly. So let’s consider anomalies.

These occur when price and volume disagree. If we see a wide spread candle but low or average volume, this is an anomaly – it takes effort to rise or fall, and if the market has risen or fallen sharply and the volume is low or simply average, then this is sending a warning signal that the market makers are not joining this move, and therefore it is a warning signal of a potential reversal in due course. Equally if we see a narrow spread candle, but high or very high volume – again this is an anomaly. Why? Because effort = result – and for this amount of effort then the market should have moved dramatically higher or lower. It hasn’t. In which case this is another strong signal that something is happening which is inconsistent. In this case, in the up move, it is a signal that the market makers are selling into weakness, and the start of a possible selling climax, whilst such price action in a move lower is signaling buying by the market makers, and the start of a buying climax.. What I call topping volume and stopping volume.

In the case of hammer candles and shooting star candles, this is where the price action alone is telling us a story, purely from the candle, with volume simply confirming the level of buying and selling associated with the candle. A shooting star candle is a selling candle, whilst a hammer is a buying candle. Once you have considered the signal candles then its time to zoom out to the bigger picture with candle patterns, support and resistance and multiple timeframes all playing their part in the analysis. Finally, and just to clarify, if you are using the MT4 platform then this may be confusing you, as the Volumes indicator paints the volume bars red and green which has nothing whatsoever to do with buying or selling. All this is telling you is whether the volume bar is higher or lower then the preceding bar – it is not telling you whether the volume is bullish or bearish. That is something we have to do ourselves from an interpretation of the volume price relationship.

I hope the above helps and you will be pleased to know that I am in the process of writing a new book on volume price analysis. This will contain many worked examples to explain all the principles across all the markets, something which many readers have been asking me to write for some time. Once again many thanks for writing and thank you for your patience, and wishing you every success in your trading – Kind regards Anna

About Anna 1012 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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