How to read a Chart - Part I: Perspectives on Volume
Updated
Part I - Perspectives on Volume
A. Plain Volume
Introduction
As volume is the most important indicator on price and trend, it is often overlooked and more often not even used. But overall, volume is by far the easiest indicator of all, especially if used in conjunction with price and trend.
As many traders are relying on indicators, trying to ready something out of it - especially trend strength, possible turning points and divergences, exhaustion, breaks, flops, fall-outs, lagging trends and so forth can be seen on a blank chart.
Volume and Direction
Below you’ll see trending where price is following volume and vice versa (Fig. 1).
I’ve colored the volume in black, because too often the volume is colored on behalf of the close of the price range (candle or bar), which is confusing, irritating or even misleading.
As you see, I’ve taken a screenshot of the 15 minute time frame of NIO, but the following doesn*t rely on any specific stock, instrument or asset or any specific time frame; but as always you should take two things into account: the higher the time frame the more reliable and valuable the data and the lower the time frame the noisier the data but the closer the perspective and the earlier the possibility to (re-)act.
Below you’re seeing the same chart with slight annotations. The red arrow above the price bars is showing short selling or profit taking, while the red arrow above the volume is showing increasing volume. The green arrow below the price bars is showing rising interest and buying, while the green arrow above the volume is also signaling soaring interest.
In both cases, the volume is moving in the same direction as price and so this is considered to be a healthy move.
In contrast to the blue arrows above price and volume might be considered as diffident and reluctant buying. As the price is going up or even sideways, the concurring volume is vanishing and fading. According to this, the purple arrows are picturing a quite similar price action, but speaking in terms of selling.
This can be considered as profit taking, restructuring open positions and overall as a regressive move.
Why doesn't price go in one direction only? Why are these regressive moves occurring?
As especially the big trading floors, investment companies, hedge funds and the commercials are trying to get large slices of an asset, it takes time to get and to load up the desired amount. Think of it like this: If you are getting a new furniture like a table or a lamp, you`ll easily put it into the trunk of your car, but if you’re going to move from one flat to another, you’ll need a truck a certain period of time to load up or you’ll even need to drive a few times forth and back before everything is in its new place.
Trend strength
Based upon the former information we are now able to see the basic price moving in trend and regression, but sometimes - or even too often - the two aren’t trodding in the same direction. This is giving clues about the strength of an ongoing move as visualized by the orange arrows in the following figure and is usually easier to spot in upward than in downward movements (the reasons why, I am glad to explain in another chapter).
Divergences
As being one of the most favored tools of interpretation, divergences are also one of the most tremendous and even without any special tools to discover on a blank chart. We speak of divergence if the indication is showing another price direction as the chart itself is. In a regular point of view of the Dow Theory a trend is established by higher highs and higher lows, whilst a sheer price action divergence is considered to be the appearance of a lower high or a lower low in an uptrend and for a downtrend vice versa. A price/volume divergence is seen in the image below.
As marked by red circles, the consecutive higher highs aren't emphasized by increasing volume, rather the opposite is true: the volume of the subsequent high is at best at the same level as the precedent. This is considered classic divergences.
Volume peaks and lows
For the final part of volume basics on a naked chart, we need to have a look at volume spikes. To estimate move and direction properly, we need to ask where the spike has happened. If the previous move was up, the volume should also have risen to a certain extent to display the healthiness of the move. Usually, the peak of the blank volume is appearing on the end of a move, either up or down; therefore, a reversal might happen soon indicated by the red and green arrows in the figure hereinafter).
On the other hand, if a higher than usual volume is occuring at a resistance and breaking through, a future move seems likely.
But if the peak is happening within a range at no specific point of interest, then sellers or buyers most probably have cashed in and closed their positions.
When going for volume lows, it is quite easy: lows are usually appearing if there is no interest in buying or selling
B. Volume Delta and Cumulative Volume
Generally speaking, all of the analysis as written above might also be taken into account if looking at volume deltas. In the figure below. For this I’m using the “Simple CVD over MA” (https://www.tradingview.com/script/dXKrpgeQ-co-n-g-Simple-CVD-over-MA/) to exemplify the ease of use of volume; the settings are cumulative volume over previous bar, smoothed over the last 14 periods of the weekly time frame - displayed on the daily chart. Within this indicator, the asset is uptrending if the volume is above the zero line, and the histogram is colored green if the actual cumulative volume is higher than the previous.
This indicator, even if not very sophisticated, is visualizing the volume trend with a quick blink. The fading cumulative volume is indicating a regression until the valley has started to form (tagged in orange); furthermore, the histogram color is providing a good - or even the perfect - entry for a quick trade or a longer term swing; whilst the summits signaling a level for profit taking or a partial close of a position.
As a matter of fact, considering the upward sliding of the price just before the first green arrow whereas the volume is heavily fading, might also be regarded as divergence although they are easier to spot if either the calculated time frame or the ma period is set to a smaller value than used in the example.
Just bear in mind: As nothing in life is safe to a hundred percent, reading volume is stacking up the probabilities on your side.
___
Note:
As I’m writing a book about trading,
I am going to post a couple of short articles on topics like trend, volume, Dow theory, auction theory and behaviorism.
If you are spotting some errors or if you like to add something, feel free to comment or pm.
Cheers,
Constantine - co.n.g.
A. Plain Volume
Introduction
As volume is the most important indicator on price and trend, it is often overlooked and more often not even used. But overall, volume is by far the easiest indicator of all, especially if used in conjunction with price and trend.
As many traders are relying on indicators, trying to ready something out of it - especially trend strength, possible turning points and divergences, exhaustion, breaks, flops, fall-outs, lagging trends and so forth can be seen on a blank chart.
Volume and Direction
Below you’ll see trending where price is following volume and vice versa (Fig. 1).
I’ve colored the volume in black, because too often the volume is colored on behalf of the close of the price range (candle or bar), which is confusing, irritating or even misleading.
As you see, I’ve taken a screenshot of the 15 minute time frame of NIO, but the following doesn*t rely on any specific stock, instrument or asset or any specific time frame; but as always you should take two things into account: the higher the time frame the more reliable and valuable the data and the lower the time frame the noisier the data but the closer the perspective and the earlier the possibility to (re-)act.
Below you’re seeing the same chart with slight annotations. The red arrow above the price bars is showing short selling or profit taking, while the red arrow above the volume is showing increasing volume. The green arrow below the price bars is showing rising interest and buying, while the green arrow above the volume is also signaling soaring interest.
In both cases, the volume is moving in the same direction as price and so this is considered to be a healthy move.
In contrast to the blue arrows above price and volume might be considered as diffident and reluctant buying. As the price is going up or even sideways, the concurring volume is vanishing and fading. According to this, the purple arrows are picturing a quite similar price action, but speaking in terms of selling.
This can be considered as profit taking, restructuring open positions and overall as a regressive move.
Why doesn't price go in one direction only? Why are these regressive moves occurring?
As especially the big trading floors, investment companies, hedge funds and the commercials are trying to get large slices of an asset, it takes time to get and to load up the desired amount. Think of it like this: If you are getting a new furniture like a table or a lamp, you`ll easily put it into the trunk of your car, but if you’re going to move from one flat to another, you’ll need a truck a certain period of time to load up or you’ll even need to drive a few times forth and back before everything is in its new place.
Trend strength
Based upon the former information we are now able to see the basic price moving in trend and regression, but sometimes - or even too often - the two aren’t trodding in the same direction. This is giving clues about the strength of an ongoing move as visualized by the orange arrows in the following figure and is usually easier to spot in upward than in downward movements (the reasons why, I am glad to explain in another chapter).
Divergences
As being one of the most favored tools of interpretation, divergences are also one of the most tremendous and even without any special tools to discover on a blank chart. We speak of divergence if the indication is showing another price direction as the chart itself is. In a regular point of view of the Dow Theory a trend is established by higher highs and higher lows, whilst a sheer price action divergence is considered to be the appearance of a lower high or a lower low in an uptrend and for a downtrend vice versa. A price/volume divergence is seen in the image below.
As marked by red circles, the consecutive higher highs aren't emphasized by increasing volume, rather the opposite is true: the volume of the subsequent high is at best at the same level as the precedent. This is considered classic divergences.
Volume peaks and lows
For the final part of volume basics on a naked chart, we need to have a look at volume spikes. To estimate move and direction properly, we need to ask where the spike has happened. If the previous move was up, the volume should also have risen to a certain extent to display the healthiness of the move. Usually, the peak of the blank volume is appearing on the end of a move, either up or down; therefore, a reversal might happen soon indicated by the red and green arrows in the figure hereinafter).
On the other hand, if a higher than usual volume is occuring at a resistance and breaking through, a future move seems likely.
But if the peak is happening within a range at no specific point of interest, then sellers or buyers most probably have cashed in and closed their positions.
When going for volume lows, it is quite easy: lows are usually appearing if there is no interest in buying or selling
B. Volume Delta and Cumulative Volume
Generally speaking, all of the analysis as written above might also be taken into account if looking at volume deltas. In the figure below. For this I’m using the “Simple CVD over MA” (https://www.tradingview.com/script/dXKrpgeQ-co-n-g-Simple-CVD-over-MA/) to exemplify the ease of use of volume; the settings are cumulative volume over previous bar, smoothed over the last 14 periods of the weekly time frame - displayed on the daily chart. Within this indicator, the asset is uptrending if the volume is above the zero line, and the histogram is colored green if the actual cumulative volume is higher than the previous.
This indicator, even if not very sophisticated, is visualizing the volume trend with a quick blink. The fading cumulative volume is indicating a regression until the valley has started to form (tagged in orange); furthermore, the histogram color is providing a good - or even the perfect - entry for a quick trade or a longer term swing; whilst the summits signaling a level for profit taking or a partial close of a position.
As a matter of fact, considering the upward sliding of the price just before the first green arrow whereas the volume is heavily fading, might also be regarded as divergence although they are easier to spot if either the calculated time frame or the ma period is set to a smaller value than used in the example.
Just bear in mind: As nothing in life is safe to a hundred percent, reading volume is stacking up the probabilities on your side.
___
Note:
As I’m writing a book about trading,
I am going to post a couple of short articles on topics like trend, volume, Dow theory, auction theory and behaviorism.
If you are spotting some errors or if you like to add something, feel free to comment or pm.
Cheers,
Constantine - co.n.g.
Note
Concerning this section:"Below you’re seeing the same chart with slight annotations. []"
As the red arrow above the price bars is showing short selling or profit taking while the volume is increasing (the red arrow above the volume) indication a valuable information on the consistency of the move downward. Alike, the green arrow below the price bars is showing rising interest and buying, while the green arrow above the volume is also signaling soaring interest suggesting an ongoing upward move.
In both cases, the volume is increasing accordingly to price, which means for a down trend that the interest is increasing while prices are falling and for an up trend that the volume is increasing as price is soaring.
This is considered to be a healthy move accompanying the overall trend.
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