TRADING VOLUME (Part 3)

Price and Trading Volume. Definitive Guide to Volume in Trading.

Market PHASES and Volume

Richard Wyckoff was the father of price and volume analysis. His studies on supply
and demand remain intact today.

Wyckoff's five concepts that are at the heart of VPA and make up the market phases
are the following: accumulation, distribution, trial, sales climax, and purchase climax.

Here it is, the complete market cycle. The first campaign is the accumulation phase.
Specialists are beginning to fill their warehouses at wholesale prices, which are empty
after the strong downward movement.

Once the warehouses are almost full, then the buying climax begins, with volatility in
the price action to attract more assets, and once completed, they exit the price zone
and check the supply.

If all the selling has been absorbed, specialists can begin marking the market higher in
steps with volume, again creating confidence in traumatized investors and speculators.

As confidence returns, the trend begins to gain momentum, incorporating buyers who
now believe that the market is going to “go to the moon.”
With the market now at the retail level (i.e. at an expensive price) is when the
distribution phase begins, with prices raised to attract more buyers and then lowered to
trap them.

Finally the selling climax begins, with volatile price action and remaining inventory
being removed from warehouses. Once empty, the market breaks down, exiting this
price area and again a test is run, this time of demand.

If the test confirms that the purchase has been absorbed then the campaign is
completed and the market is moved lower quickly.

The cycle is complete, and it only remains for the specialists to count their gains and
repeat the exercise again, again and again, again and again…. I'm sure you get the
idea.

Ultra-high volumes show us more clearly that the market is preparing for a trend
change. When we see price action and high volumes associated with a selling climax,
then we know that a bearish trend reversal is in prospect. When we see price action
and high volumes in a buying climax, then we know that we are likely to see an
uptrend begin soon. That's guaranteed.

This is what the high volume and associated price action is telling us. It really couldn't
be clearer.

 Accumulation

The accumulation phase is the process

by which the professionals (the strong hands) buy, little by little, from the weak hands
as many assets as possible until the supply disappears completely. It will be then and
not before when, as there is no resistance that hinders the rise, prices will rise, giving
rise to a bullish phase of the market.

Making a logistical simile, Accumulation is the term used to define an “accumulation

phase”, which is the period that specialists take to fill their warehouse before launching
a marketing campaign to sell their shares. So accumulation is the purchase by
specialists that can last days, weeks or months, depending on the instrument that was
purchased.

The question is how do specialists encourage everyone to sell? . It is actually very

simple, news is published that is perceived as bad for an asset or market. Specialists
take the opportunity to move the market rapidly downwards, causing a cascade of
sales as they begin their accumulation phase, purchasing assets at the lowest possible
prices or at the 'wholesale' price following the logistical simile. .
Repeat purchases by specialists are highlighted in blue (note the large volumes)

Once the campaign has begun, the price action then follows this typical pattern, where
the market is repeatedly moved up and down. This type of price action is essential to
'shake' sellers out of the market.

 Distribution

The distribution phase is

the exact opposite of the accumulation phase.

The distribution phase is the process by which the strong hands will sell, little by little,
their assets to the weak hands until there is no one left willing to continue buying and
prices fall due to lack of demand.

Continuing with the logistical simile, with a full warehouse, specialists now have to start
moving the price higher, to encourage somewhat nervous and resentful buyers to re-
enter the market.

At the top of an uptrend, traders and investors have seen the market slowly move
higher, gaining momentum before rising rapidly, and it is at this point that they buy,
fearful of being shut out of any “quick gains.” . This is precisely the point at which
specialists are preparing to pause and retreat.
TRADING VOLUME (Part 4)

Price and Volume Trading. Definitive Guide to Volume in Trading.

 Test or Test

Testing the Offer

One of the biggest problems

that specialists face when setting up any campaign is that they can never be sure that
the entire sale has been absorbed after an accumulation phase.

How can specialists overcome this problem? The answer is that just like any other
market, they test it to gauge the market reaction and check that all the selling has been
absorbed in the accumulation phase. The test is as shown in the left image:

The market is marked lower with strong selling volumes, a test to see if it is possible to
drive out the remaining sellers. If volume remains low, this tells specialists that few
sellers remain and that virtually all of the selling has been absorbed in the
accumulation phase.

If sellers were still in the market, the candle would have closed lower above the
volume average.

In this case, the test was a success and confirms that any selling pressure has been
removed. Precise candle formation is not critical, but the body should have a narrow
range, with a lower depth wick. The body color can be bullish or bearish.
With the test now confirmed the specialists can move the market higher towards the
target distribution level, confident that all the old selling has been absorbed.

However, what would

happen if the test fails and instead of low volume a high volume appears, which
is a problem? . It would result in sellers returning in large quantities forcing the price
down.

In the image on the right, it is evident that this time the selling has not been absorbed
into the accumulation phase, so any attempt to take the market higher may or may not
progress.

A failed test means only one thing: the specialists will have to take the market back
lower once again and quickly, to 'shake' these sellers out of the market. The market is
not ready to continue rising, and therefore specialists have more work to do before the
campaign can restart.

This is equivalent to a failed test in an advertising campaign. However, once the test
has been repeated and confirmed with low volume, the market will rise.

Testing the Demand

Again, a test is used to ensure that all purchasing

pressure (demand) has been absorbed in the distribution phase, and this is done with
a demand test while the campaign is running.
Specialists are now happily selling on waves of bullish news. Investors and
speculators rush to buy for fear of missing out on a golden opportunity and motivated
by greed. Specialists stop increased demand by shaking up prices and gradually
emptying their warehouses of all stock inventory.

If demand is low, then all the purchasing has been absorbed in the distribution phase,
as we can see in the image on the left.

There is no demand, as evidenced by the low volume.

Here we have the end of the distribution phase. The warehouses are empty and the
next stage is a strong downward movement to repeat the process and move into an
accumulation phase once again and replenish your warehouses again.

The image on the right is not what specialists want to

see when preparing to move away from the range. The market is marked higher
and buyers flood into it thinking that the uptrend is going to continue and move even
higher.

As before, a failed test stops the campaign and the specialists have to move back into
the distribution pricing area and drive these buyers out of the market using the same
processes as before.

Once completed a retest is done, and if the volume is low, then the downtrend
accelerates, trapping traders in weak positions at this level.

 Sale Climax

The sales climax is the 'last cry' before the specialists take
the market further down. It is the latest major effort to force the market higher,
attracting nervous traders and speculators who can no longer wait. They are infected
by the fear of losing, and they buy.
This occurs two or three times with high volume with the market closing again at the
opening and at the end of the distribution phase. Following the selling climax, the
market then breaks down and fast.

Here we are going to see high volume next to a candle that has a long upper wick and
a narrow body and this is one of the most powerful combinations of price action and
volume

The color of the candle body is unimportant. What is important is the height of the
wick, and the associated high volumes.

This is sending a clear signal that the market is ready to move quickly and as the
warehouses are empty, the reaction will be quick.

 Purchase Climax

It marks the end of the accumulation phase and signals the

beginning of the uptrend.

The specialists have taken the market downwards and panic has exploded.
Specialists then move into the accumulation phase to replenish the warehouse and
move prices back and forth in a narrow range to shake out the last remaining sellers.

Towards the end of this phase, specialists mark prices down quickly, driving out more
sellers before moving the price higher.

The specialists are now ready, with their warehouses overflowing with assets, to start
the march north and begin the upward trend, with nice and simple steps towards the
target price for distribution.

TRADING VOLUME (Part 5)

Price and Volume Trading. Definitive Guide to Volume in Trading.

Candle PATTERNS and VPA

In our third post on Volume, we're going to start looking at EPS in action using the
most powerful candlestick patterns.

 Shooting Star

Price action – weakness.

Its appearance does NOT signal an immediate reversal. Its appearance indicates
potential weakness at that point in the price action. Only volume can give a clear signal
as to the relative strength of this weakness, and consequently the extent of any
reversal.

In an uptrend a shooting star with average volume below may simply indicate a
possible pause in the uptrend.

As the trend develops further, this initial weakness can be confirmed with additional
shooting star candles, with average volumes.

Once we have two candles of similar proportions in a trend, and on the same time
frame, we can compare the volume between the two candles. If the volume of the
second star is greater than the first, the 'weakness' has increased as more sales are
coming to the market and forcing the price down.

In other words, individual candles are important, but multiple occurrences of the same
candle, in the same price zone, exponentially increase the level of the downside or the
upside.

In Fig. 1 it is evident that the market is going to fall. The market is really struggling at
this level, and the last two could certainly be considered part of the selling climax.

Typical Price Action with Shooting Star candle

 The market is in an uptrend, when a shooting
star candle appears on the chart, maybe it even has medium volume above it. Does
the appearance of this candle mean a major trend change or just a minor pause and
pullback ? The answer is, based on this candle, we don't know. The appearance of the
first shooting star is our signal to take note and look for pitas.

If we are in an area where prices have previously reversed, then this may give some
clues about the likely depth of the reversals.
Additionally if the price action has recently broken an accumulation phase, then it is
unlikely to be the start of a possible reversal.

The next step is to check the upper and lower time frames for a broader perspective
on this signal and for context. For example, if this price action had appeared on a one
hour chart, and on checking the 15 minute chart, we could see two shooting star
candles had formed in that time frame, both with above average volume, this gives you
confirmation that any reversal may be more significant.

1. A shooting star with low volume is a sign of weakness, but it is probably not
significant unless it is a test of demand after a selling climax.
2. A shooting star with medium volume is telling us that there is weakness, it is a
relatively strong signal, and more important than in the first example of low
volume.
3. Finally, when we have the shooting star with high or very high volume, this is
where the professional puts the sale out.

There is never an anomaly with a shooting star , only validation of the signal
strength. Volume always confirms the price action with a shooting star, and all we have
to do is consider whether it is low, medium or high or very high, and different time
frames in terms of price action.

 Hammer
 Price action – strength

It is a sign of strength in the absorption of the sale, with enough force for the buyers to
overwhelm the sellers.

The hammer is signaling “forced buying” by experts, and the shooting star is signaling
“forced selling.”

As long as the market moves down quickly, there will always be selling that has to be
absorbed at higher levels, this inventory has to be cleared before going lower once
again. Because if this does not happen, they will be left with a significant tranche of
inventory purchased at a high price, and not at wholesale prices. A price waterfall will
always pause, pull back up, before continuing down.

Like the shooting star, it is immensely powerful when combined with VPA.

Always, volume is the key , and if volumes have been increasing in price, this is a
strong sign of additional weakness to come. Therefore, a single hammer simply will not
be enough to stop the movement, even if the volume is higher than average.

The power of the hammer candle, like the shooting star, becomes evident once we see
a sequence of two or three of these candles accompanied by high or very high volume.
It is at this point where we know for sure that we are in the shopping climax zone and
you just have to be patient.

On the other hand, once the buying climax has been completed, we will likely see one
or more tests using the hammer candle. For a successful test, the volume must be too
low, and there may also be more than one test.

The same points as the shooting star apply to the hammer candle.
For example, the market may be going down, and we see a hammer formed. If the
volume is low, then it is clear that insiders are not buying at this level. Perhaps if the
hammer is followed by a shooting star with high volume, it is a sign of weakness in the
downtrend.

A hammer with a low volume candle indicating minor weakness, average volume
suggests stronger signals of a possible reversal, while high volumes are largely buy
signals.
Again, there are never any anomalies with a hammer candle.

A candle can have a very different meaning depending on where it is in the overall
trend. At the top of an uptrend the hammer is called a 'hanging man' and when it
appears in a candlestick pattern with a shooting star it is signaling weakness.

 Hanged Man

Price action – potential weakness after uptrend

This candle is considered the first sign of selling pressure in the market. The body of
the candle can be red or blue.

The hanging man is validated if it is followed by the appearance of a shooting star in

the next few candles, especially if it is associated with average above or high volume.

The key here is validation. By itself it is not a strong signal, but it simply gives us early
warning of a possible change.

TRADING VOLUME (Part 6)

Price and Volume Trading. Definitive Guide to Volume in Trading.

 Long Legged Doji

Although there are many different types and sizes of

doji candlesticks, there is only one type that I believe is important in the context of
VPA, and that is the long-legged doyi.
The doji candle itself means indecision. The market is reaching a point where bullish
and bearish sentiment is equally balanced.

Like the hammer and the shooting star, price action alone gives us a firm signal, but
when combined with volume, it becomes immensely powerful.

If we are in a long uptrend, and the long-legged doji appears, then this may be the first
sign of a bearish trend change.

However, unlike the shooting star and hammer candle, with the long legged doji
candle you can have an anomaly in volume.

On the chart in this case we have little effort (low volume) and a large result (wide
range). This is clearly an anomaly, and the only logical answer is that the price is being
displaced by the institutional ones. They are not buying or selling themselves, but
simply 'accumulating' the price around it, usually by means of a news story.

When the news is released, it is often the first place where we see volume spikes. If
the increase in volume has validated the price movement, then we can be sure that the
institutional ones are joining in. If it has not been validated, then it is an anomaly and
other forces are at work. This is telling us to be cautious. Volume and news must go
hand in hand.

A long-legged doji candle should always be validated by a minimum of medium volume

and preferably high or ultra-high. If it is low, then it is an anomaly and therefore a trap
set by the institutionalists.

 Wide Spread Candles

Price action – strong market sentiment

It is either strongly bullish or strongly bearish, but the word is strong.

 If the volume is above average, then we should wait to see how the price is
validated. The institutional people are joining the movement higher and
everything is as it should be.
 If the volume is below average or low, this is a warning sign. The price is being
marked higher, but with little effort. Many retail traders are rushing to join the
movement thinking that this is a valid move by the market. But the volume
reveals a very different story.
  Narrow Spread Candles

Price action – weak market sentiment

A narrow range candle should have low volume – again effort vs result. These are of
little interest to us. However, what are of great interest are the anomalies, where we
see above the average, or high volume, narrow range candle.

If we have a candle with a narrow range and relatively high volume, then the market is
showing some signs of weakness. As we know high volume should result in a wide
spread of the candle, not a narrow range. Effort vs result again. Institutionals are
starting to struggle at this price level. The market is resistant to higher prices.

Once again, this is the first sign of a potential bearish-to-bullish reversal. Later candles
can confirm this, a hammer, or possibly a long legged doji to add more weight to the
analysis.

 Stop Volume

Price action – strength

We are in a strong downtrend, however, institutionals now want to start slowing down,
so start getting in and starting the buying process.

What is happening is that the weight of the selling pressure has become so great at
this point that even the institutional movers in the market do not have enough strength
to stop the market from falling.

In a market that is being driven by panic selling , the pressure is enormous.

  Volume Cap

Price action – weakness

The downtrend pressure is certainly more intense as the market is moving faster
overall.

In the figure, the last candle in this “perfect” scheme is our old friend, the shooting star.

We are now looking at the distribution phase which then culminates in the climax sale,
before moving to the next phase of the market cycle.

TRADING VOLUME (Part 7)

Price and Volume Trading. Definitive Guide to Volume in Trading.

TREND lines

Fig 1 First reference point – Reverse

The first sign of the formation of the trend is the breaking of congestion, this break will
grow in solid volumes until the formation of a maximum in price with a decrease in
volume.
The price and volume will rise until a retracement is reached, where a considerable
decrease will be observed compared to the previous volume.

In the case of the image Fig. 1, you can see that supply is running out, as there is very
low volume in the pullback formation.

Fig. 2 Second reference point – Rebound

We now have our first reference point at the highest price and we know that the market
will invest lower. This could be a major reversal, which is unlikely given the low
volume, but at this stage it is never a sure thing and you should be patient.

The volume drops which is a good sign, then the market stops and reverses up with
the volume rising again.

We now have the second landmark in our top tour, as you can see in Figure 2.

As long as the volume continues to confirm the

price as in Fig 1 and 2, then everything is correct in the bullish movement.

The turning points that are formed are our signals to define the limits of the trend.
Retracements will mark the upper region of the trend and rebounds will mark the lower
region.

The next target for us is a second pullback to the upside, as long as it is above the
previous high of the pullback and the volume decreases. Once this second pullback
high has formed, we then again expect a rebound with increasing volume.
Thus the market will continue to rise, and we will look for our third setback and
rebound at the highs of the trend in formation.

Naturally, the above is a textbook example of what we want to see in each trend, but
trading does not always show such ideal opportunities, and sometimes these reversal
pivots do not appear.