Table of Contents

Chapter 1: Volume: Why Is It Important?

Chapter 2: Understanding Price Bars

Chapter 3: Understanding Volume at Key Support and Resistance Areas

Chapter 4: Understanding Volume in Trends

Chapter 5: Volume and Divergence

Chapter 6: Wyckoff Spring and Upthrust

Chapter 7: Incorporating Volume in Your Trading Plan Using the THD Indicators

Chapter 8: Incorporating Volume into Your Trading Plan without the THD Indicators

Chapter 9: Volume Versus Tick Count

Index
Table of Contents

Chapter 1: Volume: Why Is It Important? 2

Chapter 2: Understanding Price Bars 10

Chapter 3: Understanding Volume at Key Support and Resistance Areas 29

Chapter 4: Understanding Volume in Trends 37

Chapter 5: Volume and Divergence 42

Chapter 6: Wyckoff Spring and Upthrust 53

Chapter 7: Incorporating Volume in Your Trading Plan Using the THD Indicators 61

Chapter 8: Incorporating Volume into Your Trading Plan without the THD Indicators 68

Chapter 9: Volume Versus Tick Count 72

Copyright 2012 TradersHelpDesk.com

 Chapter 1
Volume: Why Is It Important
 Chapter 1: Volume: Why Is It Important?

Basically, volume is a measurement tool that reflects the overall activity in an

instrument based on the number of buyers and sellers in the market. In other words,

volume shows the enthusiasm of buyers or sellers during a specified period, as well as

the liquidity of the instrument. Although volume may be displayed differently on charts,

it is typically displayed as a single, non-directional, histogram which represents the total

number of buyers and sellers for a given period. Non-directional means that as price is

making higher highs or lower lows, the volume bars will typically be making new highs.

For example, in Figure 1: Standard Volume Indicator, the red histogram bar at the

bottom of the chart represents the overall number of buyers or sellers for each 15

minute bar. A trader may look at this type of volume representation to evaluate the

liquidity of the instrument. This tells him or her whether there is sufficient activity to

enable one to enter or exit a position easily.

 Figure 1: Standard Volume Indicator

Volume can also be displayed as Volume Up (buyers) or Volume Down (sellers).

Figure 2: Volume Up vs. Volume Down , shows the volume displayed as two separate

indicators, Volume Up (green histogram bars) and Volume Down (red histogram bars).

By displaying volume in this manner, a trader can compare the buying volume to the

selling volume for a specified period.

 Figure 2: Volume Up vs. Volume Down

By comparing the two volume displays, a trader can assess whether there is more

enthusiasm shown by the buyers or by the sellers during a specified period. In an

uptrend, buyers should have more enthusiasm than sellers. When a market reaches a

top, buyers will lose enthusiasm and sellers will take over. In a downtrend, sellers

should have more enthusiasm than buyers. At the bottom, sellers will lose enthusiasm

and buyers will take over. However, this change in buying or selling interest is typically

very subtle. Buyers or sellers will come in very slowly to test price at either the highs or

lows.
 Figure 3: Volume Comparison shows the same chart as Figure 2, but with

horizontal lines drawn at 2500. Comparing the buyers to the sellers using this level, you

can see that sellers showed more enthusiasm than buyers for a period of time. Then at

Point A, buyers began to take over. At Point B, sellers tried to come back but showed a

lack of enthusiasm, as they were not able to push price lower. At this point, buyers

stepped in and began to push price upward.

Figure 3: Volume Comparison

As can be seen in Figure 3, the turnover in enthusiasm was very discreet. Sellers

did not just exit the market in one bar. Instead, they lost interest as price was moving

lower (Point A). Then they re-entered to determine whether there were sufficient sellers

to enable price to continue the downward movement (Point B). However, the fact is

that sellers could not push price lower. This indicated to the buyers that the sellers had

lost interest. Then, buyers began entering the market, pushing price upward.
 The hidden secret in this exchange was a decrease in selling activity at the low of

Point A. Instead of driving price lower, sellers interest decreased. This was the first

sign of weakness in price continuing to move further down. The final test of sellers

interest was at Point B, when even though more sellers came in, they could not push

price lower. For all their enthusiasm and interest, there was no reward for their effort

because price did not go lower. At this point, the buyers' interest overwhelmed the

sellers' interest and price increased. The result is shown in Figure 4: Results from

Sellers Lack of Enthusiasm.

Figure 4: Results from Sellers' Lack of Enthusiasm

When comparing Figure 3 and Figure 4, the change of interest (from selling interest

to buying interest) preceded the upwards price movement. It is for this reason that

volume is considered to be a leading indicator, as the selling volume or lack, thereof ,

heralds the upward price movement.

As with most other trading indicators, volume can be as complex or as simple as a

trader chooses to make it. Today, there are many types of volume indicators available.

Some are based on averages of actual transactions of buyers versus sellers over a

specified period. Others are based on order flow, a measurement of buyers versus

sellers from actual order flow. Some are more complicated than others and there is no

one volume indicator that is magical. The efficacy of a volume indicator is more

dependent upon how well the trader can understand and interpret the volume at any

given period than on the indicator itself.

During my struggle to understand volume, I often became discouraged trying to

differentiate between the volume bars that mattered versus the volume bars that should

be ignored. I read many books on the importance of volume. Unfortunately, it was like

reading a foreign language. Unable to understand it, I would give up, only to revisit the

concept later. Finally, after taking a course on Cumulative Delta Volume Analysis, the

mysterious principles behind the importance of volume as a trading indicator became

increasingly clear to me. With this new found clarity, I wanted to find a simpler way for

my students to grasp the magic of what I now understood.

The first concept that must be appreciated by any student of volume is that the key

to volume analysis, resides in whether a price bar makes a high or a low. If a price bar

does not make a high or a low, i.e. an inside bar, then the volume really does not

matter. This eliminates the need to study a volume bar that has no significance.

Therefore, these volume bars can be eliminated. Figure 5: THD Free Volume shows

the resulting volume analysis indicator with the volume bars eliminated when price has

not made a high or a

low.

Figure 5: THD Free Volume

The dark cyan bars indicate the volume when price makes a new high. The red

bars indicate the volume when price makes a new low. The gray bars indicate when a
price bar makes a new high and a new low on the same bar, i.e. an outside bar. When

this occurs the trader must look to see if the close of the price bar was at the top or the

bottom. If the price did not close at the top or bottom then the volume bar is ignored.

Figure 6: Volume Interpretation at Highs and Lows illustrates how to read the gray

volume bars. Point A makes both a High and Low (outside bar) and the price bar closes

in the middle. This would be considered a neutral price bar and the volume would be

ignored. Point B, also makes both a High and Low (outside bar). However, the price

bar closes at the bottom of the bar and should be read as a seller's bar. Then, at Point

C, the price makes another outside bar (both a high and low on the same bar) but

closes at the very top. Therefore, the volume bar at Point C should be read as a buyer's

bar.

Figure 6: Volume Interpretation at Highs and Lows

Of course, to understand the significance of volume when price makes a high or a

low, the trader must be able to determine when price makes a high or a low. This is
discussed in the next chapter.

Chapter 2
Understanding Price Bars
Chapter 2: Understanding Price Bars

A price bar typically has four components: Opening Price, Closing Price, High Price

and Low Price. The opening price indicates where the instrument's price was at the

moment the price bar began. The closing price indicates where the instrument's price

was at the moment the price bar ended. The high price indicates the highest price the

instrument achieved during the specified period. The low price indicates the lowest

price the instrument achieved during the specified period.

Figure 7: Price Bar

Components

In Figure 7: Price Bar

Components, the first price bar is

known as the Open, High, Low and Close price bar. The open price is indicated by the

dash on the left side of the vertical line. The close price is indicated by the dash on the

right side of the vertical line. The top of the vertical line is the high and the bottom of the

vertical line is the low.

Price bars two and three are both candlestick bars. When using candlesticks, if the

bar is green, it is considered an up bar. To get an up bar, the closing price must

always be greater than the opening price. If the bar is red, it is considered a down bar.

To be considered a down bar, the closing price must always be lower than the opening

price. If the price bar is gray, then the opening price and closing price are the same.
 Since a price chart is comprised of many price bars displayed together, we look for

patterns within the price bars to predict where price may go in the future. There are

several price bar formations that are predictive of where price may go. Let's begin with

an isolated high. Figure 8: Isolated High shows that the last bar on the chart is an up

bar because the high of the bar is higher than that of the previous bars. However, when

we look at the close, it is greater than the open but near the bottom of the bar. In other

words, price opened and buyers pushed price up and then sellers came in and pushed

price back down. This indicates that the next bar should be a down bar.

Figure 8: Isolated High

Figure 9: Three Bar Reversal to Downside shows that the next bar has formed and

it is a down bar. Notice that the close of the down bar is also lower than the low of the

bar forming the isolated high. This pattern is known as a three bar reversal to the

downside indicating that price should go lower. A necessary condition for a three bar

reversal is that the down bar following the isolated high bar must close lower than the

low of the isolated high bar.

 Figure 9: Three Bar Reversal to Downside

Figure 10: Isolated Low shows that the last bar is an isolated low because the low

of that bar is lower than the previous bars. The close, although less than the open, is at

the very top of the bar. This means that sellers stepped in and lowered prices only to

have buyers overtake them, pushing the price back up. This indicates that the next bar

should be an up bar.
 Figure 10: Isolated Low

Figure 11: "Three Bar Reversal to Upside" shows that the next bar did go up and

that the close of that bar was higher than the high of the isolated low thereby fulfilling

the conditions for a three bar reversal, this time to the upside. Therefore, price should

move upward. As you can see, price did go up.

Figure 11: Three Bar Reversal to Upside

Figure 12: Engulfing Pattern shows price was moving up and then the last bar on

the chart (red candlestick) totally "engulfs" the previous bar. In other words, the high is

higher than the previous bar and the low is lower than the previous bar (also known as

an outside bar). Since the close was at the bottom of the bar, this signals a reversal in

trader sentiment and the market should now make a new low.
 Figure 12:

Engulfing Pattern

Figure 13: Engulfing

Pattern Type Two shows a second type of engulfing bar pattern. At Point A, the price

bar goes down and closes at the bottom. Then, the next price bar, Point B, opens and

closes on the high. Some traders also refer to this as an engulfing pattern, as well, since

price went straight down and then came straight back up. This is a weaker type of

engulfing pattern.
 Figure 13: Engulfing Pattern Type Two

The engulfing pattern usually occurs only after a substantial downward movement

or substantial upward movement.

Figure 14: Doji Bar shows an isolated low indicating that sellers were able to take

price down to a new low and then buyers stepped in and reversed the price movement

so that it closed exactly at the open of the bar. This is also a reversal pattern. Also,

notice that the preceding bar is also a "doji". However, the difference is there were only

three ticks of movement in this bar. It opened, moved down one tick, then moved up

one tick and closed exactly where it opened. It gives us no clue as to whether buyers or

sellers controlled the bar since there was not sufficient price movement.

Figure 14: Doji Bar

Figure 15: Results of the Doji Bar shows the resulting price action after the doji.
 Figure 15: Results of the Doji Bar

Another pattern indicative of where price is likely to go is

the outside bar. Figure 16: Outside Bar shows this

formation. The final bar totally encompasses the previous bar(the condition for a bar to

be considered an outside bar) and closes down. This indicates that price should

continue downward.
 Figure 16: Outside Bar

Figure 17: Results of Outside Bar shows that price does continue downward as

anticipated.

Figure 17: Results of Outside Bar

The opposite of the Outside Bar is the Inside Bar. Figure 18: Inside Bar shows this

particular price formation. The price bars directly beneath Points A and B form inside

bars because their movement was encompassed within the previous price bar. This

type of bar tells us that price is pausing. In other words, buyers and sellers are

anticipating their next move. One trading strategy with inside bars is to mark the high

and low of the bar that preceded the inside bar and then trade in the direction of the

breakout range. For instance, in this example, the price bar after Point A, closed above

the high of the line at Point A and, therefore, an upward movement would be

anticipated.
Figure 18: Inside Bar

On the live edge of the market, there will be many isolated highs, isolated lows and

reversal bars formed throughout the day. The key in recognizing the potential price

movement of the next bar is to pay attention to where the bar forming an isolated high

or an isolated low closes, and where the reversal bar forms.

For isolated highs and lows, the closing price is the most significant indication of

future price movement. If the isolated high closes at the top, the next bar should be

up. However, if the isolated high closes on or near the low, the next bar should be

down. The opposite is true of isolated lows. If the isolated low closes at the bottom of

the bar, then we are expecting the next bar to be a down bar. However, if the close is

at or near the top, we are expecting the next bar to be an up bar. Figures 19 to Figure

26 show how this plays out on the live edge of the market, bar by bar. Each bar that

made a high on the live edge closed at the top of the bar. Then price made a high but

closed on the low of the bar signaling either the beginning of the retracement or the end

of the trend.
Figure 19: Significance of Closing Prices

Figure 20: Significance of Closing Prices

Figure 21: Significance of Closing Prices

Figure 22: Significance of Closing Prices

Figure 23: Significance of Closing Prices

Figure 24: Significance of Closing Prices

 Figure 25: Significance of Closing Prices

Figure 26: Significance of Closing Prices

While reversal bars are often used for identifying market tops or market bottoms,

they can also be used for identifying when a potential retracement will occur and,

afterwards, the resumption of the trend (trend continuation entry). For example, if price

is moving up, a reversal bar can signal the beginning of a retracement. At the end of

the retracement, another reversal bar can appear, which signals a possible entry point

into the continuing trend. Figure 27: Reversal Bar for Retracement and for Entry Into

Trend shows these reversal patterns. At Point A, we have the doji bar formation

indicating a reversal. Price reverses to the downside and another reversal bar is formed

at Point B signaling the end of the downward movement.

 Figure 27: Reversal Bar for Retracement and for

Entry Into Trend

Remember, in Chapter One, we learned that volume is a leading indicator, meaning

that it will lead price. To understand this concept, let us apply volume to the chart above

and see if volume did in fact lead price in these movements. In an uptrend, volume

should be increasing on the highs. In a downtrend, volume should be increasing on the

lows.

Figure 28: Diverging Volume on Reversal Bars shows that at Point A, on the high,

instead of increasing volume there is decreasing volume. Also, notice that instead of

measuring from volume bar to volume bar, we measure from the largest volume bar that

formed a high to volume bars that formed subsequent highs. Using this technique, we

can see that at the close of the price bar at Point A, there are two divergences.

However, since we are not using any other indicators on the chart, it is the close of the

bar after Point A that confirmed the reversal because the close was below the low of

Point A thus making it a reversal bar.

Then at Point B, when price made a new low and formed a reversal bar, the selling

volume was decreasing not increasing. Again, we measure subsequent low volume

bars against the largest volume bar on a low. Both of these, diverging volume and a

reversal bar at a low, indicated that volume was not in alignment with price so that price

was likely to change direction.

 Figure 28: Diverging Volume on Reversal Bars

Although there were several divergences as price was making lower lows, it was

the divergence with the combination of a reversal bar that confirmed a shift to buying

sentiment was in progress.

Figure 29: Result of Decline in Sellers shows the results of the diverging volume on

a reversal bar. Since sellers were unable to move price lower on increasing volume,

buyers stepped back into the market and price went up again.

Figure 29: Result of Decline in Sellers

While reading price bars combined with volume is important, predicting where price

is likely to go is crucial in calculating your risk to reward potential. If price is only going
to move eight ticks and the risk is sixteen ticks, then without a very high winning

percentage, a trading account will suffer significant drawdowns very quickly.

The next chapter discusses how to anticipate price movement based on support

and resistance.

Chapter 3
Understanding Volume at Key Support
and Resistance Areas
 Chapter 3: Understanding Volume at Key Support and Resistance Areas

Support and resistance areas are points where price will most likely come to a halt

or will reverse direction. There are numerous methods for identifying of support and

resistance areas. The most natural support or resistance area is prior highs and lows.

Anytime price makes a new high, the new high would be considered a resistance area.

When price breaks the resistance area, (highs) it then becomes support. Anytime price

makes a low, it is considered a support area. Then, when price breaks the support area

(lows), what was previously support becomes an area of resistance.

Support and resistance can also be identified using lines based on a mathematical

calculation derived from defined price points (either using the open, high, low, and close

or any combination of these price points). Subsequently, if price is above the line, then

the line is considered to be support. If price is below the line, then the line is considered

to be resistance. Just a few of the different types of support and resistance lines that

traders use are as follows:

Bollinger Bands

Keltner Channels

Linear Regression Channels

Moving Averages

ATR (Average True Range)

Pivot Lines
 Fibonacci Lines

Triangles and Pennants (based on trendlines)

The type of support and resistance that a trader chooses to use is a personal

choice. One main purpose for using any of the indicators listed above is to identify

areas of support and resistance. In other words, traders are simply identifying where

price will meet support (price is above the line) or resistance (price is below the line). It

really is that simple.

Instead of focusing on which magical indicator to use for support and resistance,

the trader needs to focus on three key elements:

Consistency - using the same methodology and indicators day in and day

out

Price at the support or resistance levels

Volume at the support or resistance levels

Before we discuss volume at key areas, let's talk about consistency, which is a key

element that most traders lack. Consistency means that you are doing the same thing

day in and day out which ultimately should lead to consistent profits. If today you are

using Bollinger Bands and tomorrow you are using Fibonacci Lines, then you are not

being consistent. Sure there are days when one method will work better than another.

And the next day, the other method might work better. Each day in the market is

unique. Constantly changing your charts will create a sense of chaos and your charts

will reflect it. By having too many support and resistance lines on your chart, you are

frozen. Price will always be covered and there will always be a reason, based on the

various support and resistance areas, not to take a trade. Instead, pick one or two that

you like and stick with them. This way you can measure your progress and, since you
are always using the same concepts day in and day out, you can identify when

something "out of the ordinary" is occurring. In other words, on your charts, using the

same concepts each day, you become an expert in reading your market, your chart, and

the support and resistance method that you chose.

Now, let's begin by looking at some of the easiest and simplest concepts to identify

using price and volume. In the following examples, I will be using an eighty period

moving average to identify either the support or resistance area. At points A and B in

Figure 30: Volume and 80 Period Moving Average, each time price touched the moving

average, divergence formed on the highs. This indicated that buyers were not

interested and sellers could easily take price back down due to lack of interest by the

buyers.

Figure 30: Volume and 80 Period Moving Average

Volume indicates interest. If buyers were interested, the volume bars would be

increasing as price approached the slow moving average. Typically, they would first

break the moving average on increasing or high volume. Then, price would retrace and

test the same area it just broke. This confirms that the area has become a support area

for price to increase.

 In Figure 31: Volume and Price Breaking Resistance, price breaks the 80 period

moving average on high volume and then immediately returns to test for support. As it

is approaching the eighty period moving average it does so on decreasing volume. The

lack of sellers confirms that the eighty period moving average has found support and

price will continue upward.

Figure 31: Volume and Price Breaking Resistance

In Figure 32: Volume and Price Breaking Support, shows just the opposite

scenario. Price breaks the eighty period moving average on high volume. Then price

returns to the same area to test for resistance. As it returns, the volume decreases

indicating a lack of interest by the buyers and price continues down.

 Figure 32: Volume and Price Breaking Support

Now, let's look at an example that shows the eighty period moving average not

supporting a price movement to the upside. In Figure 33: Volume and Price not

Supporting Move, price breaks the eighty period moving average and then begins

retracing to the same area. However, this time there is no decrease in sellers. In fact,

price makes a lower high (Point A) slightly above the moving average and sellers step

back in, taking control (Point A1). In other words, sellers were still interested in taking

price lower. After making a new low (Point B), they go back to test the moving average

for resistance. Although they initially broke through the eighty period moving average at

Point C, they did so on decreasing volume (Point C1), so sellers immediately identified

this as weakness and step back in (Point C2).

 Figure 33: Volume and Price not Supporting Move

Price points can also be used for support and resistance. In other words, when

price makes a high, it is considered to be a resistance area. When price makes a low, it

is considered to be an area of support. In Figure 34, Lower Volume at Previous High, at

Point A, price makes a new high. It then retraces on decreasing volume, indicating that

the previous high (Point A) would be retested. Price goes back to this area and makes

a new high (Point B). When the volume of these two areas is compared, the volume at

Point B is lower than the volume at Point A. This indicates that buyers are potentially

losing interest and there will be a test to see if sellers are interested.
 Figure 34, Lower Volume at Previous High

By reading the volume with price at key areas of support and resistance, traders

can identify strength or weakness in a potential upcoming move.

 Chapter 4
Understanding Volume in Trends
 Chapter 4: Understanding Volume in Trends

As any professional trader will tell you, trading with the trend is easier than trying to

trade against the trend (counter-trend trading). By learning to read the volume at key

areas within the trend, a trader has an excellent opportunity to enter the trend while

maintaining a low risk, high probability trend trade. In this chapter, we will focus on the

easiest volume patterns to identify that occur within trend movements.

To understand and be able to read volume within a trend, a trend must first be

defined. An uptrend is defined as a series of higher highs and higher lows. While a

downtrend is the opposite, a series of lower lows and lower highs. It is the volume

activity at the highs or lows that is most critical. During an uptrend volume should be

decreasing on the lows. During a downtrend volume should be decreasing on the

highs.

In Figure 35: Volume at Lows in Uptrend, after price made a high at Point A, it

began to retrace. During this retracement, the volume was decreasing as price made

lows (Point B). This indicated that sellers had no strength (or a lack of interest) in taking

prices lower, therefore, buyers were still in control.

 Figure 35: Volume at Lows in Uptrend

Since sellers were not interested in making new lows, buyers were easily able to

make new highs. This gives the trader a potential entry point. Additionally, a previous

low can be retested to ensure support for price to increase. For example, in Figure 36:

Testing Volume at Lows in Uptrend, price made a low on decreasing volume. However,

price came back to retest the same low. At Point B, the volume was again lower than at

Point A, where the first low was made. This gave buyers the confidence to come back

into the market and proceed to make new a high.

Figure 36: Testing Volume at Lows in Uptrend

Notice that only the volume at the comparison lows (Point A and Point B) is

measured. The volume is compared to the previous low to verify that the low is acting

as support to give price the momentum to make a new high.

In a downtrend, the volume on the lower highs is interpreted. For example, in

Figure 37: Volume on Lower Highs, price is making lower lows. Then, as price pulled

back to make a lower high, buyers were decreasing. Again, this gives the trader a

potential entry into the downtrend.

 Figure 37: Volume on Lower Highs

Just as in the case of a retest of the lows in an uptrend, each lower high is also

susceptible to a retest. Figure 38: Volume on Retest of High, shows that price made a

new low then began a retracement. On the retracement, volume decreased at the high

(Point A). Price then made a new low and began a second retracement. On the second

retracement, price failed to meet the previous high (Point B) and, as it was retracing, the

volume was decreasing. This showed a lack of interest by the buyers and gave

confidence to sellers that they could easily take price down to new lows.

Figure 38: Volume on Retest of High

These are the simplest volume patterns that occur within trend movements. In the

next chapter, we will be learning how to read more complex volume patterns. However,

to avoid confusion, you should thoroughly understand the volume patterns in the

previous chapters before proceeding as the patterns do get more complex.

 Chapter 5
Volume and Divergence
 Chapter 5: Volume and Divergence

Up until now, I have avoided using the word "divergence". This is because I have

found that traders tend to focus on the word "divergence" and to memorize the name of

the pattern instead of focusing more on the actual pattern itself. In this chapter, we will

discuss different types of divergence. Each type of divergence indicates that volume

and price are not in alignment. Divergence can be found when price is going up and

volume is going down or it can be that volume is increasing and price is not. In other

words, divergence is when something occurs in price that is not confirmed in volume or

when something occurs in volume that is not confirmed by price.

Let's review what we should normally see in price and volume. Figure 39: Typical

Volume in Uptrend, shows that as price is increasing so is volume. This is what we

expect in an uptrend.

Figure 39: Typical Volume in Uptrend

Looking at the volume on the lows, it is almost non-existent, meaning that sellers

had no interest in making lows. Buyers had control and continued to enter the market
as price increased. This is a strong and healthy uptrend. However, that can change at

any moment. And it does change on the next two volume bars. In Figure 40:

Divergence on Highs, the volume is decreasing as price is making new highs. This is

where traders tend to misinterpret divergence. The divergence appears and they think

it signals a reversal in the market. Instead divergence is actually indicating a test for

sellers is needed, not forecasting a reversal of trend direction. Therefore, a better

approach is to wait and see what the test for sellers reveals.

Figure 40: Divergence on Highs

Now let's review what the divergence is actually telling us. Buyers were strong in

the market. They have made new highs. However, as they took prices higher, the

buyers did not continue to enter the market with strength. Instead, we see weakness

because the volume bars are shrinking, not increasing as price goes up. The decrease

in the volume bars indicates that new buyers are hesitant about entering after this

substantial move to the upside. Instead, the buyers opt to wait and see if there is a sell

off or retracement in price before entering. Now let's proceed to see what actually

happened.
 Figure 41: Volume on the Lows in Uptrend shows the volume that occurred after

the divergence in Figure 40. Initially, you may think that volume is diverging or

decreasing as it should on the lows. However, it is not. Volume went from non-existent

in Figure 40 to increasing on the lows in Figure 41. Notice that after price made the low

(indicated by the red line), none of the remaining bars made an additional low. Instead,

price made lower highs and higher lows. In other words, price went into a congestion

formation (erratic highs and lows). Again, the trader needs to wait for confirmation to

see which way price will move.

Figure 41: Volume on the Lows in Uptrend

Now, let's look at how this played out after the first low. Figure 42: Resumption of

the Trend, has Points A - E marked on the chart. Let's slowly step through what

happened.
 Figure 42: Resumption of the

Trend

1. At Point A, price made the first low in the

retracement. Volume, when compared to the previous lows in Figure 40, was

increasing.

2. At Point B, price makes a new low, again on higher volume. This is not the way

volume should act in an uptrend. In an uptrend, volume should decrease on the

lows. However, price is not in a downtrend because the highs are not lower highs.

3. At Point C, price makes a new low, again on increasing volume. The question here

is, "Is price changing direction?" By looking at the highs, we can establish that a

downtrend is not in place because price is not making lower highs. Instead it is

making equal highs.

4. Three bars later, at Point D, price makes a new high on lower volume when

compared to the previous volume bar. At this point, we can identify two critical

aspects: (1) the uptrend has not been reestablished because although price is

making higher highs, it has not made a higher low and (2), volume should increase

as price makes a new high as this indicates another test for sellers is needed.

Again, we wait for confirmation of a change in trend or a resumption of the current

trend.
5. At Point E, price makes a higher low on lower volume. This is the resumption of

the uptrend because we are now making higher highs and higher lows and the

volume on the lows is decreasing.

Figure 43: Result of Resumption of the Trend, reveals the resulting upwards

movement in price. The test for sellers and resumption of the trend took a total of thirty-

one bars to play out. Using the knowledge of an uptrend and understanding the volume

behavior in an uptrend, as well as at highs and lows, allowed the trader to wait until

price and volume agreed before entering, thereby reducing their risk and increasing the

probability for a successful trade.

Figure 43: Result of Resumption of the Trend

Before proceeding, let's review the basics of what we have learned so far, applying

it to both uptrends and downtrends:

1. An uptrend consists of higher highs and higher lows.

2. A downtrend consists of lower lows and lower highs.

 3. Congestion is an erratic series of highs and lows.

4. In an uptrend, volume should increase on the highs and decrease on the

lows.

5. In a downtrend, volume should increase on the lows and decrease on the

highs.

6. Volume is a non-directional indicator. This means that when price is making

new highs, volume should be increasing or when price is making lower lows,

volume should be increasing.

7. Divergence is when price and volume are not in agreement.

8. When price makes a new high on lower volume, we should expect a test for

sellers.

9. When volume increases on the lows in an uptrend, we must wait for a lower

high to be established before determining if price has changed directions.

Then we must confirm that volume is decreasing on the higher lows before

entering in the direction of the prior uptrend.

10. When volume increases on the highs in a downtrend, we must wait for a

higher low to be established before determining if price has changed

direction. Then we must confirm that volume is decreasing on the lower highs

before entering in the direction of the prior downtrend.

Now, let's observe what happens when a market reversal occurs, and changes the

trend from up to down. Figure 44: Divergence at Top of Market, indicates that we are

making higher highs in price and lower highs in volume. According to what we have

learned so far, this means there will be a test for sellers.

 Figure 44: Divergence at Top of Market

We must now wait to see what the seller's test reveals. In Figure 45: Low on

Increasing Volume, price has made a low on increasing volume. Then, price made a

lower high. This signaled additional weakness in the uptrend. We now draw lines off

the lower high and the lower low and wait to see what happens.

Figure 45: Low on Increasing Volume

Figure 46: Testing Lows and High, shows that price comes back to test the low on

decreasing volume. Price should now go back to the lower high. Price does go back to
the lower high on decreasing volume. In other words, buying interest is decreasing as it

approaches the lower high.

Figure 46: Testing Lows and High

Price is not in congestion because the highs and lows are not erratic. However,

sellers are decreasing on the lows and buyers are decreasing on the lower highs.

Again, waiting is the best option. Then, in Figure 47: New Lower Low and Lower High,

price makes a new low and sellers are starting to enter (slowly). Price then makes a

new lower high, establishing a downtrend with buyers uninterested in taking price up.
 Figure 47: New Lower Low and Lower High

Price then begins to move down, making lower lows and lower highs, with

increasing volume on the lows, Figure 48: Lower

Lows on Increasing Volume.

Figure 48: Lower Lows on Increasing Volume

Notice that price made a lower high but on increasing volume, Figure 49:

Increasing Volume on Lower Highs, highlights this area. This can be confusing. After

all, if sellers are increasing why would buyers increase, as well? Buyers did try to

come in and take price up, the key is they failed. They increased their efforts, but they

were not rewarded for their extra efforts. Sellers immediately stepped back in and took

control.
 Figure 49: Increasing Volume on Lower Highs

This is but one of the ways that a market can reverse. In the next chapter, we will

discuss the Wyckoff Spring and Upthrust patterns that also signal market reversals.
 Chapter 6
Wyckoff Spring and Upthrust
 Chapter 6: Wyckoff Spring and Upthrust

In this chapter, we will be discussing two patterns that were initially identified and

described by Richard Wyckoff, the founding father of volume analysis in the early

1900s. One is an upthrust and signals an uptrend reversal pattern. The other is a

spring, a downtrend reversal pattern. Let's begin with the upthrust.

While this can be a very complex pattern, I prefer a simpler version. Basically, you

have an upward movement in price that forms an area of resistance. Price then goes

back to test the resistance area on volume that is at least 40% or greater, without a 40%

or greater movement in price (Wyckoff used a 50% threshold but I have found that 40%

works just as well). Figure 50: Upthrust Volume Pattern, shows the

simplicity of this pattern.

Figure 50: Upthrust Volume Pattern

Point A indicates a high in price with the associated volume bar. We extend a line

out from the high of the price bar and this is called the supply line. After a retracement,

price returns to the supply line marked as Point B. As price returns to the supply line,
volume increases substantially when compared to the volume at Point A. However,

even though the volume increased more than 40%, the actual price movement, in

comparison, was not substantial. This indicates that although price made a high, there

were actually more sellers than buyers because, if all the volume was actually buying

volume, then price would have moved up substantially above the supply line.

While Figure 50 shows the upthrust on a relatively short timeframe, Figure 51:

Upthrust on Longer Term Chart, shows two upthrust patterns on a longer term chart. At

Point A, the supply line is identified. Price retraces and returns to the supply line with a

40% increase in volume. Price fails to move 40% higher resulting in a downward

movement. At Point C, again, price comes back to the supply line on even higher

volume and, again, there is not sufficient reward for the effort shown in the volume so

price drops.

Figure 51: Upthrust on Longer Term Chart

With the advances in technology, and the fact that traders can now trade very small

timeframes, these patterns are easily identifiable on the smaller timeframes. The only
difference is the distance between the initial supply line that is established and the

actual test of the supply line. On smaller timeframes, there is less distance between

the high that establishes the supply line and the eventual test of the supply line

(considered the testing area). The larger the timeframe the more distance between the

testing areas.

Back in the 1900s, when Wyckoff was trading, they did not have instantaneous

access to volume as we do today so Wyckoff used the upthrust pattern to identify the

end of an uptrend but, it can also be used to identify entries into an existing downtrend.

For example, in Figure 52: Upthrust in a Downtrend, the market had been moving lower

and a high was made at point A. Then price returned to test the same area at point B.

Although the volume at Point B is greater than 40% in comparison to the volume at

Point A, there was no substantial increase in price. Therefore, sellers were actually

entering at Point B, as evidenced by the lack of price movement in relation to the

volume increase. Then price returns to the same supply line at point C on volume that

is also greater than the volume of point A (supply line high). Again, there is no

substantial increase in highs and price falls. Instead of assigning the pattern only to the

end of an uptrend, we are looking further into the information that is given with the

pattern. In each of the tests in Figure 52, there was an increase of greater than 40% in

volume activity. Therefore, if this is truly buying volume then price should have

increased from the high at point A to the high of point B by a distance of at least 40%,

however, it did not do so. Therefore, we can assume that most of the volume within the

bar is actually selling volume, which is why the buyers received no reward for their

efforts.
 Figure 52: Upthrust in a Downtrend

Before we move on to identifying a spring, let's

review the upthrust pattern:

1. Price makes a high. We call this the supply line.

2. Price retraces off the high and moves down.

3. Price comes back to the supply line on an increase of volume that is at least
40% greater than the high that formed the supply line.

4. Price closes below the supply line.

Now, let's look at what a spring is and what it tells us. The Spring pattern was also

developed by Richard Wyckoff as a signal to the end of a downtrend. The Spring

formation can present in two different formations, however, I will only discuss the

easiest and most common formation in this book. The most common formation is when

price makes a low, retraces, and then returns to test the same area. Price will make a

new low but does so on decreasing volume showing that sellers are no longer

interested in making lower prices. For example, in Figure 53: Wyckoff Spring

Formation on Lows, price made a low, retraced, and then came back to test the low. As

price came back to test the low, it did so on decreasing volume, showing a lack of

interest by the sellers to take prices lower.

 Figure 53: Wyckoff Spring Formation on

Lows

Notice in Figure 53, when price came back to test the low, it broke the support line

and then closed above the support line, indicating that the support line was holding

price up. Figure 54: Wyckoff Spring Close Below Support, shows an example of where

price forms a support line at Point A and then price actually closes below the support

line at Point B. After breaking the support line, price retraces and comes back to test the

support line a second time at Point C. Both are acceptable.

 Figure 54: Wyckoff Spring Close Below Support

Let's review the formation of the Spring:

1. Price makes a low. We call this the support line.

2. Price retraces off the low and moves up.

3. Price comes back to the support line, on decreasing volume.

4. Price closes above the support line.

Combining the power of divergence with these formations can be a very powerful

skill for traders. For example, in Figure 55: Range Bound Trading Using Divergence

and Springs, price formed a resistance line at Point A. Price then retraced slightly, only

to return to the resistance area at Point B. As price made a new high and closed under

the resistance line, volume decreased. Price then formed a new low at Point C. The

new low is a potential support line. Price returned again to the area of resistance at

Point D and made a higher high than Point A , on decreasing volume. Price then went

to test the support line and made a new low closing above the support line at Point E on
decreasing volume. Price retraced to the upside and came back to test the support line

a second time at Point F on decreasing volume. Price then retraced to the upside.

Figure 55: Range Bound Trading Using Divergence and Springs

In the next two chapters, we will expand on using the volume formations with a

trading plan, either by incorporating the THD indicators or by simply identifying a

Wyckoff Spring formation to signal an end of a downtrend or to signal a potential entry

into an uptrend.
 Chapter 7
Incorporating Volume in Your Trading
Plan Using the
THD Indicators
 Chapter 7: Incorporating Volume in Your Trading Plan Using the THD

Indicators

One of the issues with using volume and divergence is that, although the volume

patterns give an excellent indication of a potential retracement, it leaves the trader

questioning "where will price retrace to?." The answer lies in incorporating the THD

indicators.

The THD indicators project where price will go. For example, if the THD ADX

(Average Directional Index) makes a magenta peak (when the THD ADX is greater than

50 and makes a pointed top with a magenta dot or is greater than 70), then we know to

expect a retracement. Typically, the retracement will begin after a volume divergence.

Once the retracement begins, we know to anticipate price retracing to the THD ATR

stop (Average True Range). Therefore, we can identify the potential profit opportunity

by calculating where price currently is in relation to the THD ATR stop.

By incorporating the power of volume analysis, with the projection power of the THD

indicators, the trader can identify when price will retrace, identify if buyers or sellers are

weak, and then enter a trade based on this weakness or lack of weakness, as the case

may be. For example, Figure 56: Gold 720 Minute Chart shows the THD ATR Stop,

THD Volume and THD ADX. At the beginning of the chart, price is moving upwards. At

Point A, price makes a high, on higher volume, with the THD ADX increasing. As the

THD ADX line approaches 70 (red line), price is testing the previous high (actually

exceeding it by a few ticks) on lower volume (Point B). This is an indication to look for a

potential ADX magenta peak (a pointed top with a magenta dot). Using volume analysis
alone, the trader does not know where price will retrace to. However, by incorporating

the THD ATR stop, we know to anticipate a retracement to the plus sign (+).

Figure 56: Gold 720 Minute Chart

We can take this one step further by calculating our potential profit area. The THD

ADX magenta peak came in at approximately 1669.00. The THD ATR stop, at that time,

was 1643.30. That gives us a potential profit area of twenty-six points or two hundred

and sixty ticks. But what if price does not retrace all the way to the ATR stop or, as will

happen, the ATR stop moves up with price? For this reason, we incorporate multiple

timeframes. By going down in time, we can confirm that price and volume are doing

exactly as we anticipate, thereby confirming what the higher timeframes are indicating.

Figure 57: Gold 45 Minute Chart, shows the ATR stop has changed from blue to

red, indicating a potential move to the downside. The THD ADX is also confirming the

trade as the ADX line is red. Price does move down and then begins to retrace after a

magenta peak on the ADX. We simply wait for price to retrace to the ATR stop on the
45 minute chart (Point A), on volume divergence (Point B), and then enter the trade at

the open of the next bar. Since our trade initiated at the ATR stop, we are guaranteed

entry at the lowest point of risk.

Figure 57: Gold 45 Minute Chart

Once we enter the trade, we use the THD Clipper to determine our stop and

automatic profits targets based on a risk to reward of 1:2. This means that for every

dollar of risk, we are anticipating a reward of two dollars. The price at entry was the

close of the bar that formed divergence and touched the ATR stop at 1675.50 (Point A).

The Clipper determined the stop to be 1677.00 (10 ticks off the high of the bar) or fifteen

ticks from entry (Point B). As you can see from Figure 58: Gold Trade One, Clipper 1 at

1672.50 (Point C), Clipper 2 at 1669.50 (Point D) and Clipper 3 at 1666.50 (Point E)

were all achieved resulting in a reward of eighteen points while only risking four and a

half points. The total risk to reward on this trade was one to four.
 Figure 58: Gold - Trade One

Shortly after our exit, the ADX made another magenta peak and price started

upward. However, in this case, buyers did not enter the market. Remember the

anticipated volume behavior for downtrends -- volume will decrease on the highs. If we

compare the current high (after the second magenta peak) with the high at the ATR, we

can see that buyers indeed decreased (in other words, there were no buyers entering

the market). The next price bar closed in the direction of the trend (down) and the ADX

went flat. We entered a short position again, using a fifteen tick stop, giving us a total

risk, again, of four and a half points. Again, as shown in Figure 59: Gold Trade Two,

the trade results in capturing Clipper 1 at 1665.10, Clipper 2 at 1662.10, and Clipper 3

at 1659.10, resulting in a reward of eighteen points.

 Figure 59: Gold Trade Two

After our exit on the second trade, another magenta peak appears. Is there a

possibility of yet another trade? We have to monitor the volume for clues. Figure 60:

Volume Comparison in Downtrend, we see that at Point A, price made a high on lower

volume, indicating buyers were no longer interested. This was our first short trade.

Then at Point B, price made a high but buyers were not interested as evidenced by the

volume not increasing. In fact, it was barely visible. This is typical volume behavior in a

downtrend. The next bar confirmed sellers returning (the bar closed down (close was

less than open) and that generated a second short entry). Now let's analyze what

happened at Point C. Price made a high and closed down. Is this the same setup as in

trade two? No. Remember at Point B, we compared the volume to the high at Point A,

and volume confirmed the downtrend (decreasing on the highs). However, this time if

we compare the volume at Point C with the volume at Point B, buyers are increasing.

This is not typical downtrend behavior on the highs since volume should be decreasing

on the highs. Therefore, we wait. At Point D, price makes a higher low. Again, this is

not typical price behavior in a downtrend as price should be making lower lows. We

wait for price to retrace to the ATR stop. As price pulls back to the ATR, it does so on

increasing volume and, therefore, indicates that there is no entry. (Remember, when
there is a gray volume bar you look to the close of the bar. The corresponding price bar

for the gray volume bar closed on the low and therefore should be interpreted as a

sellers bar.)

Figure 60: Volume Comparison in Downtrend

In summary, we were able to identify when price would begin a retracement on the

720 minute chart, where the retracement would likely end, and what the profit potential

of the move will be (two hundred and sixty ticks). By going down in time, we were able

to limit our risk to four and a half points per trade and each trade captured eighteen

points (one hundred and eighty ticks).

 Chapter 8
Incorporating Volume youre your
Trading Plan without the
THD Indicators
 Chapter 8:

Incorporating Volume into Your Trading Plan without the THD Indicators

For those readers who do not use the THD indicators, I have elected to design a

plan that incorporates the Wyckoff Spring, as I believe this is one of the easiest volume

patterns to recognize. Although Wyckoff used the spring formation for identifying the

end of a downtrend, I have elected to use this formation for entry at the end of a trend

and within an uptrend.

Figure 61: Nasdaq 1440 Minute Chart, shows that the Nasdaq was in a downtrend

for the month of May 2012. Price made a low on May 18, 2012 (Point A) and price

began a retracement on the next bar. At Point B, a

Wyckoff Spring formed.

 Figure 61: Nasdaq 1440 Minute Chart

Before we continue, let's again review the formation of a Wyckoff Spring:

1. Price makes a low. We call this the support line.

2. Price retraces off the low and moves up.

3. Price comes back to the support line, on decreasing volume.

4. Price closes above the support line.

Since price closes above the support line, this generates an entry into a potential

uptrend. Using basic money management with a risk to reward ratio of 1:2 (one dollar

of risk for every two dollars of reward), we calculate our exit point. Figure 62: Basic

Entry With Stops and Profit Targets shows the stop would be placed at 2420.00

(basically one point off the low formed at Point B in Figure 62) and the risk would be

thirty-eight and one quarter points per contract. By doubling the risk, we identify profit

targets at 2534.75, 2611.25, and 2687.75 from entry. Each profit target was achieved,

and resulted in a total profit of four hundred fifty-nine points, while only risking a total of

one hundred fourteen and three quarter points. This trade gave us a risk to reward of

one to four.
 Figure 62: Basic Entry With Stops and Profit Targets

What if you missed the first entry? Figure 63: Additional Entries for Nasdaq shows

an additional two entries using the volume analysis concepts previous discussed. At

Point C, again a Wyckoff Spring develops indicating a long entry into the uptrend. Since

price closes above the support line, an entry is again indicated.

Then at Point D, we have a reversal bar formation where the close of Point D is

above the high of the previous bar, which had formed an isolated low. Additionally,

when the isolated low was formed, volume was decreasing, which is anticipated in an

uptrend. Again, I would recommend setting the stop at least one point off the low and

then doubling the risk for each profit target.

 Figure 63: Additional

Entries for Nasdaq

In addition to using profit targets that incorporate risk to reward, a trailing stop that

is set one or more points off any subsequent higher lows, could also be incorporated to

protect profits while in the trade.

Chapter 9
Volume Versus Tick Count
 Chapter 9: Volume Versus Tick Count

This book would not be complete without a discussion of volume versus tick count. As we learned earlier,

volume is the number of contracts bought or sold. On the other hand, tick count is the number of times price

changes. A single tick is a single change in price. So if price moved from 1.00 to 1.10 back to 1.00 then to

1.25, that is three ticks or three changes in price. The missing information is the number of contracts that were

traded at each price level. However, when trading the spot forex market, since there is no central exchange,

and tick count is the only option for traders.

First, let's look at an example of each for comparison. Figure 64: Euro Trade Volume shows a 3 minute

price chart of the Euro Currency Future using actual Trade Volume and Figure 65: Euro Tick Count shows a 3

minute price chart of the Euro Currency Future using tick count.

Figure 64: Euro Trade Volume

 Figure 65: Euro Tick Count

At first glance both images look the same. However, let's actually compare the differences. Figure 66:

Euro Trade Volume Pattern shows a red line where 900 contracts were traded and three different volume

patterns, Point A, Point B, and Point C. At Point A, we see that price made a low and then later made a higher

low on lower volume. This is typical price and volume behavior in a trend. Then at Point B, price made a high,

and after making a higher low, continued up to make a higher high. However, at the last high we have volume

divergence indicating there was weakness in the trend and there must be a test for sellers. On the test for

sellers, Point C, instead of a decrease in sellers, we have an increase in sellers. This is the first sign that the

trend may be changing.

Figure 66: Euro Trade Volume Pattern

Now let's compare the points in Figure 66 to same points in Figure 67: Euro Tick Count Volume Pattern.

The first thing that stands out is that the tick count volume never reached the red line. Since we already know

that tick count is only the measurement of price changes and not actual contracts traded, this would be

anticipated. However, notice that at Point A in Figure 66, there was a decrease in selling volume (normal trend
behavior) but in Figure 67, below, instead of a decrease there were an equal number of sellers at those

points. Well, we could change our volume behavior patterns to include volume bars that are "equal to".

Let's move on to Point B. Buyers increased on the first high and slightly decreased on the second high.

While this was very visual in Figure 66, it was very small in Figure 67. In fact, in Figure 66 there was a

difference of 292 contracts, while in Figure 67 there was a difference of only 61. Again, we could simply notate

these difference and watch more closely, knowing that even a small difference in the volume could have

significant impact on price.

Figure 67: Euro Tick Count Volume Pattern

Now, let's compare Point C on both charts. In Figure 66, at Point C, selling volume was increasing,

indicating that sellers were beginning to take interest in lowering prices. However, in Figure 67, at Point C, we

have a substantial divergence as price was making lows. Was there a substantial difference in the numbers?

In Figure 66, at the first red bar at Point C, there were 980 contracts sold and at second red bar there were 997

contracts sold. This is a difference of 17 contracts. In Figure 67, at the first red bar in Point C, the volume,

using tick count, was 579 and at the second red bar the volume, using tick count, was 466. This is a difference

of -113. Now, the most important question is:-Would this make a difference in trading? In Figure 66, there

was no trade entry at Point C. In Figure 67, there was a trade entry at Point C, but you more than likely would

have been stopped out. So yes, there would be a difference in using trading volume and using tick count.

As we learned at the beginning of this chapter, tick count is primarily used for the Spot Forex markets.

There is no way to accurately say how efficient tick count is on the Spot Forex market because we only have
access to tick count for volume. However, since the release of Currency Futures, we can now compare the

Currency Future contract to the Spot Forex symbol to get a general idea. (Since the six major currency future

symbols are measured against the US Dollar, the comparison can only be performed between currency futures

contracts and spot currency where USD is listed as the second currency symbol, i.e. GBPUSD, EURUSD,

AUDUSD.)

Figure 68: Three Minute British Pound Currency Future - Trade Volume and Figure 69: Three Minute

GBPUSD Spot Symbol - Tick Count show the similarities and differences between the two.

Figure 68: Three Minute British Pound Currency Future - Trade Volume
 Figure 69: Three Minute GBPUSD Spot

Symbol - Tick Count

First, although one is the currency future and one is the spot symbol, the actual price bars and patterns

look almost identical. However, due to the fifth digit in price on the spot symbol, there are more volume bars to

read. (For traders that do not understand the fifth digit, spot symbols have five decimal points while currency

future contracts only have four decimal points. This means that with the currency future contract, price moves

from .0000 to .0001. However, on the spot currency symbol, price moves from .00000 to .00001.)

There are many differences between the volume patterns on the two charts. Lets examine the two

patterns that are most evident. Figure 70 and Figure 71 both illustrate the same price patterns. One, Point A,

is off the highs and the second one, Point B, is off the lows.

Figure 70: British Pound Currency Future - Volume Pattern

 Figure 71: GBPUSD - Volume Pattern

As you can see on Figure 70, at the second cyan blue volume bar there is a very large divergence

indicating that price will go down and test for sellers. However, in Figure 71, the divergence is minimal. Then

at Point B in Figure 70, on the second red bar, there was 40% more selling volume with very little reward for the

sellers. However, in Figure 71, the divergence was different (volume was not 40% greater) and it was minimal.

Again, depending on how closely you were monitoring the volume, both divergences in Figure 71 could have

slipped by. The next question would be, at Point B, was the divergence significant? Yes, as shown in Figure

72, the divergence from Point B, predicted the upward movement in price. And the next question would be,

would the divergence have an impact in your trading? This is an easy question with no easy answer because

it is dependent on your trading plan and where you are in the trade. For example, if you were in the trade, and

the first two profit targets were achieved, then the divergence would have been a trigger for an exit or a signal

to have at least lowered your stop. Other traders could have interpreted the volume as a breakout of the small

congestion area and were immediately underwater in the trade with a potential of being stopped out.
 Figure 72: Result of

Divergence from Point B

One additional concept to discuss is the use of tick charts with volume. Traders use tick charts to take

"noise" out of their charts. Instead of looking at how price moves during a specified period of time, they opt to

measure the number of price changes. Therefore, before we discuss the reading volume on a tick chart, let's

understand how a tick chart is built.

Remember ticks are the number of changes in price. When using a tick chart, the chart is built using the

number of changes in price. Therefore, a 540 tick chart of the Nasdaq is displayed based on each price bar

being representative of 540 price movements -- there is no correlation to time. In other words, it may take one

minute or ten minutes to build a complete price bar that is representative of 540 price movements.

In my opinion, there are a couple of issues with tick charts and volume. Some professionals say that tick

count is at least 80% as accurate as true volume. If this is the case, then you are actually building a price chart

based on volume, since tick count is as accurate as volume. Also, when using tick charts, you are limiting the

volume to a specified number of price movements (which is correlated with volume because volume is what

creates the changes in price).

Since we cannot compare a tick chart to a minute chart (remember ticks charts are built independent of

time), then we can only look at what the tick chart demonstrates and see if the volume patterns are the same.

Figure 73: Nasdaq 540 Tick Chart shows they are not. At Point A, price makes a high. The subsequent high is

equal to the previous high on the volume bars. This is not divergence by definition, however, price did retrace.

At Point B, price made a low and the subsequent low indicated divergence. We should now be

expecting a test for buyers. The test did occur but it was on increasing volume on the high (first gray bar).
This would not be typical volume behavior for a downtrend as volume should decrease on the highs. Then,

price makes lower lows on diverging volume and we are expecting another test for buyers.

At Point C, we did have diverging volume on the highs and could have entered a short position.

However, we would have then been stopped out by Point E, when price began makings highs on volume that

was greater or equal to previous high volume. Perhaps, a trader would have noticed that price was making

higher lows at Point D, with a volume greater than 40% with no reward for sellers, and went long, only to be

stopped out later. In other words, divergence is not accurate on tick charts because you are measuring the

number of price changes and the number of contracts it takes to make the specified price changes instead of

measuring the number of contracts that it takes to make a high within a specified time period.

Figure 73: Nasdaq 540 Tick Chart

 Index

Index

12

A
ADX 63, 64, 66
ATR 31, 63, 64, 65, 66, 68

B
buyers 4, 5, 6, 7, 8, 13, 14, 17, 20, 28, 33, 34, 36, 39, 40, 41, 45, 51, 52, 56, 57, 63, 66, 67

C
counter-trend 39

D
divergence 28, 33, 44, 45, 46, 60, 63, 64, 65
diverging volume 27
Doji Bar 17, 18
downtrend 5, 27, 39, 40, 47, 48, 49, 51, 55, 57, 58, 61, 67, 70
E
Engulfing Pattern 16, 17

H
high 8, 9, 10, 12, 13, 14, 15, 16, 20, 21, 27, 29, 31, 33, 34, 35, 36, 39, 40, 41, 47, 49, 50, 51,
52, 55, 57, 58, 60, 63, 65, 66, 67, 72
higher highs 4, 39, 47, 48, 49

I
inside bar 8, 20
Inside Bar 20, 21
Isolated High 13
Isolated Low 14, 15

L
low 7, 8, 9, 10, 12, 14, 15, 16, 17, 20, 21, 27, 31, 35, 36, 39, 40, 41, 46, 47, 48, 49, 50, 51, 58,
59, 60, 68, 70, 71, 72
lower lows 4, 28, 39, 40, 48, 49, 52, 68

N
new highs 4, 40, 45, 49

O
Outside Bar 19, 20

R
resistance 29, 31, 32, 33, 34, 35, 36, 37, 55, 60
retracement 21, 26, 39, 41, 46, 47, 55, 63, 68, 70
reward 7, 29, 56, 57, 65, 66, 71, 72
risk to reward 65, 71
S
sellers 4, 5, 6, 7, 8, 13, 14, 17, 20, 28, 33, 35, 36, 39, 40, 41, 45, 47, 48, 49, 51, 52, 56, 57, 58,
63, 67
spring 55, 58, 70
supply line 55, 56, 57, 58
Support 31, 34, 35, 59, 60
support line 59, 60, 71, 72

T
three bar reversal 14, 15
tick 17, 66, 74, 76, 77, 80, 81
timeframes 57, 64
trading plan 61
trend 21, 26, 39, 42, 45, 47, 48, 49, 66, 70

U
upthrust 55, 56, 57, 58
uptrend 5, 27, 39, 41, 44, 45, 47, 48, 49, 50, 55, 57, 61, 70, 71, 72

V
volume 4, 5, 7, 8, 9, 10, 27, 28, 29, 32, 33, 34, 35, 36, 37, 39, 40, 41, 42, 44, 45, 46, 47, 48, 49,
50, 51, 52, 55, 56, 57, 58, 60, 61, 63, 64, 66, 67, 70, 71, 72
volume analysis 8, 63

W
weakness 7, 35, 37, 45, 50, 63
Wyckoff 53, 55, 57, 58, 59, 60, 61, 70, 71, 72
12
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