The core principles of volume price analysis are not difficult to grasp and the methodology can be distilled into a simple concept which is whether the price action and associated volume we see on our charts are in agreement or disagreement. If they are in agreement, then all is well. If they are not, then it’s time to conduct a forensic analysis of the candle volume relationship to see what conclusions can be drawn as a result.
And to highlight this straightforward principle I have taken the daily chart for the stock AMD to make the point and in particular focus on the rally which saw the price accelerate into a nice trend higher, taking the stock from $90 per share through to $120 plus in early August. The move higher is is associated with excellent volume confirming the move, but then we see the candle marked with the letter A on the chart appear on extreme volume and when considered against the earlier price action and volume, this is an anomaly.
Therefore, we need to ask ourselves what is happening here? First, from the perspective of Wyckoff’s third law, effort and result are not in agreement. There is a huge amount of effort going in, but the price has not resulted in a widespread candle which is what we should expect, and in addition, there is a deep wick to the top of the candle. The market makers here are selling into weakness and exiting the market, for the time being, happily selling to buyers who believe the stock is set to continue the rally. The analogy I always use to explain this is of driving a car up an icy mountainside. As the steepness increases, we apply more pressure to the gas but move less and less until finally, we come to a standstill, the wheels spinning. In other words, lots of effort for no forward progress higher. This is the power of volume price analysis which reveals what the market makers are doing through the prism of volume and therefore what is likely to happen next. I often wonder how many investors and traders who do not use volume as part of their analysis were happily buying this stock in the belief it was going higher.
By Anna Coulling
Charts from NinjaTrader and indicators from Quantum Trading
Hi . Ms. Anna, I have been working in Forex for three years, but I did not make a steady profit. I made 300% profit in 20 days in the first month, but the more I studied, the more I lost. I spent 3 years not knowing what to do. Until I get acquainted with your site and I am combining Mr. Bill Williams’ method with a larger volume. I wanted to ask Your Excellency whether there is really a possibility of continuous profit in this market or not? Also, what style should I work on my servant and combine it with volume? Thank you for your help. Sincerely, Saeed Fayazi from Iran
Hi – good to hear from you and yes it is possible – I do have students on my forex program who are doing just that but it takes effort and discipline. The style you choose must be one that works for you and which you develop for yourself as no two traders are the same, so find what you are comfortable with and develop and hone it – regards Anna