Volume Price Analysis

volume price analysis


The astonishing thing about trading is that most retail traders or outsiders I like to call them are totally oblivious to the concept of volume price analysis. It is the bedrock that most professional institutions trade with because they can’t afford not to. Those familiar with the work of Charles Dow and Richard Wyckoff would no doubt no what I mean about the concept of volume associated with the price of any financial instrument.

The Forex market and Stock markets are heavily manipulated by those that can be described as the specialists or insiders in the case of the FX markets we have central banks and market makers  all involved in this process making the Forex market the most difficult to trade.  These specialist and market makers are very good at hiding their operations and they are responsible for the practice called stop hunting and generally the manipulation of price moves commonly known as ‘trap up moves’ this is when Mr Joe public in this case you and me get sucked into a weak long or short position before the price heads in the opposite direction.

So what do we do about it? The key is to develop a professional edge. Many traders have several technical tools on their desktop, all utterly useless… In fact they should only be used as a potential compliment to volume price analysis simply because they are mainly lagging indicators and are no better than a wild guess. In fact personally I only recommend moving averages, Ichimoku kinko Hyo if you are trading a JPY pair because the Japanese use only this so it is self fulfilling and Bollinger bands that measure volatility not forgetting Fibonacci. The rest are only designed to cost you money.

Volume price analysis is the ability to monitor volume activity against price. In the stock market this is easier; in the FX market this is not so easy as volume is unreported. A good substitute  however is tick volume, this measures the change in price tick by tick so in effect is at least 80% accurate because if the price is changing a lot we can assume that buyers and sellers are active and judging by the direction the price is moving we can tell whether price is increasing or decreasing in effect telling the story of how much volume is buying or selling. Let’s take an example, a stock or currency is moving upwards and the volume is falling as price increases. This scenario suggests that price is increasing with very little effort, this is a weak move and the price is being manipulated and is not moving on genuine buying effort. If you are in a long position what should you do? GET OUT! If you are thinking about joining the frenzy? DON’T DO IT! HOLD!. That’s the power of volume price analysis. We can also extend this analysis to individual price bars, a wide spread price bar on low volume is an anomaly; price moving up with no effort, this is what the specialist call a low volume test, usually evident in the early part of the session market makers move the price up and down to locate the sentiment of the session also it is a sign of lack of interest and could be a trap up move. Similarly a low spread price bar with high volume is also an anomaly, a sign of bear or bull weakness and normally signals a major reversal almost all Dojis occur with high volume and narrow spreads and are usually reversal or indecision candles it is at this point you must be vigilant.

The specialist and market maker can’t hide volume making it the only true indicator of price action. Specialists try to use selling buy the outsiders to buy hence price never moves lower as all the selling is being absorbed by the specialists buying this ensures they don’t drive the price up as they buy and move the position against themselves. This activity usually takes place during major news releases as they take advantage of selling or buying by outsiders during those releases in effect hiding their activity but in most cases this will show on the volume. In most cases the real buying or selling associated with the news has already taken place a lot earlier most of the time on the rumor of the pending disaster.

Volume is key to understand whether a trade is good or bad. A very useful tool to have in your armoury.