Chapter Ten

Volume Price Analysis Examples

Two… key factors: correct action and patience. These you must supply
yourself.
Charles Brandes (1943-)

I hope by now I have managed to convince you of the merits and power of
Volume Price Analysis in all its various forms. My purpose in writing this
book has been twofold. First to guide you in the direction that I was fortunate
to take, when I first began trading all those years ago. Albert was a rogue,
and even though he has attracted many detractors over the years, I for one
will always be grateful for the day I happened to stumble across his article in
the newspaper. Volume to me just makes sense, it is logical, and is the only
way I believe that you can truly see INSIDE market behaviour, manipulated
or otherwise. All the charts used here are taken from either my NinjaTrader
platform, or my MT4 brokerage account.
My second reason for the book is to explain this methodology in a
straightforward way. The markets may be complex, but they are not
complicated or difficult to understand, and if you are prepared to learn and
study the charts yourself, you too can become an expert in VPA in no time.
There are no short cuts, but just like riding a bicycle, once learnt, you will
never forget. As I have said before, I do not believe any software program
can do the analysis for you. Trading is an art, not a science and the subtleties
and nuances of the market are simply beyond the capabilities of machine
code, no matter how sophisticated the program. And the principle reason why
trading is an art, is because markets are driven by people and their money and
underpinned by fear and greed.
Therefore, as we near the end of this book, I'd like to to through some
examples from various markets, and from different platforms. All have
volume. Some is actual volume, as in the cash markets and the futures
markets, others are from the spot forex market. But all of them have one
thing in common. The application of VPA is identical in each case, and
where we have VAP data, I have added this as well to complete the picture.
And I would like to start with some examples from the US stock markets and
the first chart is the daily chart for Honeywell (HON) which if Fig 10.10.
This is a nice example which teaches us several lessons on this one chart.
Whilst this is a daily stock chart, our VPA principles still apply, regardless of
market or instrument.

Fig 10.10 Honeywell (HON) Daily Chart

The stock sells off, moving lower, and initial weakness is signalled by the
small shooting star candle, which is then confirmed with rising volume and a
wide spread down candle. So no anomaly here. This is then followed by a
narrow spread down candle with higher volume than on the previous bar.
This is an anomaly, and could be stopping volume. The following day, the
market closes with a hammer candle, and high volume again. We are now
looking for this stock to pause at this level, perhaps move into a congestion
phase, or perhaps see more accumulation before a breakout and move higher.
In this case, Honeywell moves higher immediately on the following day with
a gapped up open, but the volume is only average. The following day the
price spread is narrow, and although higher on the day, the volume is falling
away. This is not a good sign and suggests weakness. The stock is possibly
not going to move too far, and does move into a congestion phase. However,
towards the end of this phase we start to see daily selling pressure absorbed
with a narrow spread down candle and high volume, again an anomaly. After
all, if this was selling, then we would expect to see a wide spread candle, and
we haven't. We have a narrow spread candle, followed by another, three
candles later.
The selling is being absorbed, and we are now waiting for a potential break
out from this region, which duly arrives. Rising volume with wide spread up
candles. A positive signal that the market is bullish. We also have a nice
platform of support below. The market then moves sideways again at the
higher level for two weeks, sliding lower, but note the down candles. The
selling volumes are falling all the time at this level, not a sign of a bearish
market. If the stock were truly bearish then we would expect to see falling
prices and RISING volume. We have falling volume. Remember, it takes
effort to rise AND fall.
Therefore, we are expecting to see buyers come into the market soon, which
is precisely what happens next, and with attitude! The buyers come in with
above average volume, and note the tail on this candle which is the last in the
current congestion phase. This looks positive.
The following day we get the breakout, with high volume. This is NOT a trap
up move, but a genuine move higher. And we know it is genuine because
VOLUME reveals everything. Not only have we seen a breakout, but this has
been accompanied by a gapped up open as well. All signs of a bullish market,
PROVIDED this is validated with volume. Three months later the stock was
trading at $76.08.
The next US stock is a particular favourite of mine. David (my husband) and
I first starting trading Duke Energy back in the days when it was $17! Now
it’s over $70. In those days we held this stock and wrote covered calls which
is a great options strategy, and the topic for another book.

Fig 10.11 Duke Energy (DUK) Daily Chart

Once again, there are several lessons to be learnt here, and the most valuable
one is patience. If you recall what I said at the start of the book. When I first
started trading using VPA I used to get very excited as soon as I saw a
hammer candle, or stopping volume and would immediately take a position
in the market. However, remember the oil tanker. It takes time to stop.
Therefore, what can we learn from Duke Energy.
First, at the extreme left of the chart we can see that the stock has been rising
on relatively low volume. The volume on the last bull candle, a wide spread
up candle, is only marginally higher than on the previous candle, which was
half the price spread. Clearly there is an early sign of weakness ahead, which
duly arrives two candles later. The stock attempts to rally before entering a
price waterfall with falling prices and rising volumes, with stopping volume
initially putting the brakes. At this point Duke Energy attempts to move
higher, but with a wick to the upper body of the candle, this is not a strong
response, and the stock price falls further, but on average volumes.
In fact the spreads on both of these candles is wide, and when compared to
the equivalent spreads in the waterfall, the volumes should be MUCH higher,
so clearly selling is being absorbed at this level. Duke Energy attempts to
rally, this time with a bullish engulfing candle, but the volume is average
once again, and clearly this is not a sign of strength just yet.
The market then pulls back with two small hammers on low volume. Is this
the final phase of mopping up the selling pressure? The answer is delivered
on the next candle with a LOW VOLUME test. The insiders are preparing the
ground. The selling has been absorbed, the market has been tested for further
selling, and the low volume test signals success, Duke Energy is now primed
and ready to move.
The stock moves higher on good volume and is subsequently followed by a
gap up day, supported with strong volume, not a trap up move but a genuine
move higher. The insiders are joining in! Then we move into a congestion
phase, followed by a further gap up and breakout on high volume, and from
this move, the stock price then declines slowly lower, BUT note the volume.
It is low! An anomaly! We can be pretty sure that the stock price is not going
to fall far. After all, if it were, we would see high volume and this is certainly
not the case with below average volumes.
The final candle in this group was then followed by a bullish engulfing
candle, and the following day, with a gapped up move higher. HOWEVER –
note the volume on the gap up, it's LOW. Is this a trap up move by the
insiders? It certainly looks weak, and the volumes following the move higher
are well below average. But note where we are in the overall price action. We
are back where we started in terms of price, and this is therefore an area of
potential price resistance given the earlier failure at this level. So we should
be DOUBLY on guard. A gap up move on low volume, and resistance ahead
!!
So what happened next?

Fig 10.12 Duke Energy (DUK) Daily Chart - Moving Forward

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.
Fig 10.13 SLV - ETF 5 Min Chart

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 intra day, 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, signalling 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.
It would be very easy for me to show you hundreds of examples where VPA
gives us great trends and great trading opportunities. It does. But what it also
does, is give us sound common sense logic on which to base our trading
decisions, and more importantly to quantify the risk on the trade itself, which
is what trading is all about.
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. But my point is this.
The examples I have chosen here are designed to teach, to educate and also to
show you VPA applied in a variety of time frames and markets, and perhaps
more importantly, that all trends and trading opportunities are relative. Here
we might have taken a position as a scalping trader and netted perhaps 20 or
30 cents on the contract.
In the earlier examples with stocks, market positions there may have been in
place for days, weeks or even months and netted hundreds, if not thousands
of dollars. It is all relative. The beauty of VPA is that your trading decisions
are based on logic. The logic of volume and price. From there, it is down to
your skill as a trader to balance your money management with your own risk
tolerance and trade accordingly. VPA will give you the trading opportunities,
but you will have to judge the risk on the trade, and how much capital you are
prepared to risk based on your assessment.
And remember, your assessment of risk will also be based on your analysis
using multiple time frames, and in the example above, a slower time frame
may well have been signalling a warning that this was a weak move and
therefore the risk on the trade was high. This may even have been against the
dominant trend. In fact it was, as the general trend for silver at the time was
bearish, so by definition, the trade was a higher risk trade anyway.
Fig 10.14 GLD - ETF 15 Min Chart

This next example is another extremely popular commodity for traders, gold,
and the ETF is the GLD fund. Once again I've taken a faster time frame here
to use as an example, and in this case my commentary is on a candle by
candle basis with no annotation. The reason is that the chart would simply be
too cluttered!
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 longer term trend for gold was
therefore bearish. This is the context against which to view this intra day
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 ultra high 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 signalling 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.
What then happened in the following day’s trading session is that the bearish
tone of the previous day was taken up in dramatic fashion, as the GLD
opened gapped down once again on three times the volume of the previous
day’s open.
Fig 10.15 GLD - ETF 15 Min Chart - Next Day!

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 in excess of 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 signalled yet more bearish pressure and heavy selling.
The above market analysis, which I have written here for you in long hand, is
really a transcript of the conversation that I would have in my head as this
price action appeared on the screen and could be for any chart, any
instrument and in any time frame. All I need is volume to give me a view of
what is going on inside the market. With this insight I can draw my
conclusions from the price behaviour. The above is on gold, but it could be
any ETF or other instrument. It makes no difference.
I now want to move to the spot forex market and here the charts are from the
MT4 platform. With MT4 we have time charts and tick volume. However,
the same principles apply.
The first example is from an actual trade I took on the Aussie Dollar on the
15 minute chart.
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.
Fig 10.16 AUD/USD - 15 Min Spot Forex Chart

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
in order to maximise 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!
The next candle is weak, and whilst the volume is below average it is another
small shooting star.
The market moves lower in steps and each attempt to rally is seen in the
context of falling volume, confirming the weakness further which is my
point.
Once you have a position in the market, you must keep revisiting your VPA
techniques as they will give you the confidence to hold and stay in the trend.
If you are short the market and it pulls back against you, but the volume on
the upwards moves is falling, then you KNOW that this is simply a
temporary pullback and not a change in trend. Equally, if any pullback has
not been pre-ceded with signs of stopping volume, then the buyers are not in
the market at that level and any reversal will not last long, so you can
continue too hold.
Equally, if you are long the market the same applies. In an up trend 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.
Here are some further examples from the world of spot forex.

Fig 10.17 AUD/USD – Weekly Spot Forex Chart : Selling Climax

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 have to 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 for ever!
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 longer term timescales. There may
be seasonal effects, days when the markets are thinly traded during holidays,
and of course days when the markets actually 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.
Fig 10.18 AUD/USD - Weekly Spot Forex Chart : Buying Climax

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 ultra high if the move is dramatic. But
for normal breakouts through an area of resistance, then above average is
fine.
The pair then develop a nice even trend higher, with some pauses along the
way. This trend lasted for over nine months before finally running out of
steam with a selling climax developing.
I now want to move into the world of futures and back to my NinjaTrader
platform. The first chart is the 5 minute on the YM E-mini futures contract,
an extremely popular index futures contract for scalping, and derived from
the Dow Jones Industrial Average in the cash market.
There are two versions of the index, the 'small' Dow and the 'big' Dow. This
is the small Dow with each index point worth $5, whilst the big Dow is $25. I
ALWAYS recommend new traders to any market to start with the smallest
instrument, so if you are new to index trading or indeed the futures market in
general, start with the mini Dow.
The reason I wanted to show this example is really to focus on the open of
the market. As I explained earlier, these contracts now trade virtually 24
hours a day, and therefore the open of the physical market is not the surprise
that it once was, as this will generally follow the trend of the electronic
contract, which will have been trading overnight following the close of the
exchange.
Fig 10.19 YM E-mini 5 Min Chart

What do we see here? First, we have a gapped up open, so the electronic

contract must have ticked up from the physical close of the day before, which
you can see here. Volume is high and a nice wide spread up candle closes the
first five minutes of trading. The big operators are joining the move. The next
two candles are down, but the volume is falling, so we do not expect the
market to move far, and indeed the lower wick on the second of these
candles, is a clue that this is simply some early profit taking on the gap up
open, and that the buyers are in control.
From there, the market moves steadily higher. There are no signals of a
reversal, just a steady rise, with minor pull backs, but each time we see a little
wave lower, then this is balanced by a wave higher in the volume trend,
which is what I was trying to describe earlier. You do have to be a little
flexible in how you view volume in a rising (or falling) trend. What is
interesting here is if we compare the first 'wave' with the second 'wave' in
terms of the buying volumes. Volumes on the second wave in the up move,
are slightly lower than volumes in the first wave, so we may begin to think
that perhaps this move was running out of steam, and possibly time to exit the
trend. However, there is nothing particularly frightening in any of the
subsequent price action, and indeed as we can see on the right of the chart,
the down candles have very low volumes. But interest appears to be waning
and we need to be vigilant.
One further point on this chart, before we move on to look at another.
The move higher after the first few candles of the open would also have
given us confidence as the index broke above the initial resistance area
created at the open. This is only a secondary resistance level, but nevertheless
another 'confidence builder' for us in taking a position in this market. The
same applies at the right hand side of the chart as the market moves into a
congestion phase, and coupled with the general decline in volumes, this may
prompt us to exit at this stage.
Fig 10.20 ES E-mini 10 Min Chart

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.
Moving to yet another platform, a different market and a different type of
chart. So far, all the charts we have considered in our volume analysis have
been based on time, but many traders, myself included like to trade tick
charts for some markets. If you have never used such charts to trade, then I
would urge you to consider these as part of your trading education, for one
simple reason.
When we trade on a time based chart, for example a 15 minute chart, every
bar or candle on the chart is created in 15 minutes. By contrast when we trade
on an 80 tick chart, each candle will be created according to the time it takes
to complete. In other words, the time taken to build each candle will depend
on the energy and activity in the market. It is, yet another way to consider
volume or market activity. A tick on a futures chart essentially records an
order, but that order could be for one contract or a hundred contracts.
However, the point with a tick chart is this. If the market is very active and
there is a great deal of buying and selling, let's say after a news
announcement, then each 80 tick candle will form very quickly, perhaps in
just a few seconds, as there are hundreds of orders flowing through the
market in a very short space of time, each of which is recorded as a tick.
Therefore if we were watching a tick chart following the release of the NFP
data, then the candles would form as though being fired from a machine gun
– they would literally print on the chart at high speed, but each tick candle
would take a different length of time to form. So in seeing the speed of
creation of the tick candles, we are also, in a sense, seeing inside the market
and the 'volume' or activity that is associated with this buying and selling
frenzy.
This is something you will NEVER see on a time based chart, since each
candle is defined by the time frame of the chart. On a tick chart it is not, and
this is a key difference and why many full time traders and professional
traders only use tick charts.
To put this into context for you, imagine a tick chart in the following
scenarios.
First in the example above, the open of the New York trading session and an
NFP data release. Each 80 tick candle would form in seconds and perhaps in
milliseconds. Now imagine the same chart overnight in Asia, where perhaps
we are overlapping the close of one market and the opening of another. Then
the time taken for each candle on the chart might be 30 seconds, perhaps even
a few minutes.
And the point is this. With a tick chart, you see the activity visually with the
speed the candles are created. With a time chart, you never see the activity,
just a price moving higher or lower as the candle forms. This is the difference
between tick and time based charts and is why many traders prefer to trade on
tick charts. With a tick chart, we are seeing 'inside the market' and it is
reinforcing our volume analysis. After all, volume is really nothing more than
'activity' which is what we see visually with a tick chart.
One important point about tick charts is if the volume is also represented as
ticks, all we would see would be a series of 'soldiers' of equal height, with
each one representing 80 ticks or 80 transactions. In order to overcome this
problem, most platforms will provide the option of selecting either tick
volume or trade volume when setting up a chart, and this is certainly the case
with another of my trading accounts. Here we simply select trade volume
when setting up the chart, rather than tick volume, and we then have volume
reported in trade size, which gives us our variable volume bars.

Fig 10.21 Coffee Futures - 80 Tick Chart

The session for the Coffee contract as shown in Fig 10.21 opened with a
weak move higher before rolling over and sliding lower, but as you can see,
with very little selling pressure at this stage.
The market is moving lower, but the volume is falling so this is not a market
that is going far.
Then we see the large operators moving into the market. Volume spikes
higher and continues to rise with the market which marches North in nice,
even wide spread candles. However, on the 9th volume bar, we see our first
sign of weakness, ultra high volume and no price action to match. The candle
spread is wide, but judged against the candles and price action that has just
pre-ceded it, the reaction from the market should have been much stronger.
This signals weakness and the large operators are starting to struggle,
although there is only a small upper wick on the candle at this point.
The market then goes into consolidation with above average volume and
narrow spread up candles with wicks to the upper body, confirming the initial
weakness first seen in the trend higher. The market then rolls over and sells
off on high volume, and the attempt to recover, is marked with rising prices
and falling volumes, a further sign of weakness. This is duly confirmed again
with the price action at this level marked with a shooting star candle, the
catalyst for the price waterfall which followed.
It is interesting to note, even though I did not add this example for this
particular reason, but the recovery from the price waterfall appears to have
occurred with little evidence of buying volume or stopping volume. This in
itself is suspicious. After all, this is a significant fall, and despite being a fast
intraday chart, we would still expect to see high volumes at the bottom.
Therefore could this action be a further extended trap up move higher on low
volume? Not quite and this is where we always have to be careful.
The volumes in the move up were so extreme they tended to distort the
volumes elsewhere during the session, and in fact scrolling forward, the
volumes at the bottom of the price waterfall were well above average, but
distorted by the volumes in the bullish trend. Nevertheless, this coffee future
did sell off the following day and never moved higher during this session.
Therefore, this is always a point worth remembering. Whatever the
instrument we are trading, we must try to have an idea of what is considered
to be 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.
Finally, to round off this chapter I would like to examine one of the most
widely followed indices around the world, and that is the Dow Jones
Industrial Average. The Dow 30 is considered to be, by the media, who know
very little if anything about the financial markets, a leading benchmark of the
US economy. It is not, but never mind, and it simply gives me a topic for
another book!
I wanted to end this chapter with this index, as it really makes the powerful
point, that VPA works in all time frames for all instruments and for all
markets. Here in Fig 10.22 we have the weekly chart for the DJIA and really
for those investors amongst you reading this book, this is precisely the sort of
time horizon you would be considering for longer term investing in stocks, of
which the primary indices will be key.

Fig 10.22 DJ30 - Weekly Chart

Even just a quick cursory glance at this chart tells us where the major buying
occurred. It is so obvious, and proves the point about VPA. Your eye should
be drawn instantly to those anomalies, of either extreme highs, extreme lows,
or concentration of volumes in certain areas. From there, you then dig deeper
and take a more forensic view at the macro level. This is a classic chart with
the market rising, then rolling over a little, before rising further, then rolling
over again with the classic rounded tops.
The market makers came into the market strongly over an eleven week period
(the yellow box), and then continued to stock up over the next six to eight
weeks at this level, so the market was consolidating in this region for 4 - 5
months. This is the length of time that accumulation may take, and no move
will be made until they are ready.
The question everyone is now asking, is how much further can this market
go, and the answer is to look at the volume. Since the accumulation phase,
the index has climbed steadily on average volume with no particular extremes
one way or the other. For a major reversal to occur, we need to see signs of a
selling climax in this time frame, and this is certainly NOT the case at the
moment.
If and when this does appear, then as VPA traders we will see it instantly,
whether on the monthly, weekly or daily chart. Volume CANNOT be hidden
from view, and no matter how hard the market makers try, and they do have
tricks to hide large block orders, most of the daily trading volumes are free
for all to see. They may be clever, but have yet to work out a way to hide
volume from view!
Now in the next chapter I want to highlight some of the price patterns, that I
believe help to give us additional pointers and guidance in our analysis of
price action and the associated volume.