Volume Price Action Analysis

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Volume Price Action Analysis in Trading

In this article, I am going to discuss Volume Price Action Analysis in Trading. Please read our previous article where we discussed 3 Rules for Volume Analysis in Trading. At the end of this article, you will understand the following. 

1. Understanding Market Structure through Volume Swing Analysis
2. Strength and weakness of swing through volume price action analysis
3. How to analyze volume in trading

Understanding Market Structure through volume analysis

In the first part, we have studied 3 laws of volume analysis. These are

1. THE LAW OF SUPPLY AND DEMAND
2. THE LAW OF CAUSE AND EFFECT
3. THE LAW OF EFFORT VS RESULT

Based on these laws we know the analysis of the big picture is market structure analysis using volume. Because the final decision-making depends open the market structure

Market Structure

It is similar to learning to read a new alphabet-once you understand the characters, you can read the words, and once you know the words you can read the story. So market structure consists of short-term swing

• The market moves in an up downswing, what we call a market swing. In a healthy bull trend, the upswing generally exceeds the downswing in length, the reverse is true for the bear market
• Hence by observing market swing, we are able to glimpse into the structure of the market and get clues on whether the market will move up or down
• So basically price move in an uptrend or downtrend

1. In a healthy bull, the trend Price Makes Higher High (HH) and Higher Low (HL)
2. In a healthy bear, the trend Price Makes Lower High (LH) and Lower Low (LL)

Let’s understand the rally (opposite of decline)

What happens during the rally?

During the rally, what has been going on? Two things

1. First the buying of stock by those who are covering their previous short sales(after knowing that they are in the wrong direction) and
2. Second, actual new buying by those who expect the advance to continue

What happens after the rally?

1. If the rally is due to more short covers than long buyers then, it is likely to be declined in future
2. If the rally is due to actual new buying, the trend is likely to continue

How can I tell which type of rally is? (Short covering or long buying)

Watch the volume and momentum of price changes

• If PRICE is rising with momentum and VOLUME is rising, it means the market is STRONGLY BULLISH. The move is by long buyers. HARMONEY
• If PRICE is rising but VOLUME is falling and momentum also falling, it means the market is WEAKLY BULLISH. The move is by short covering. DIVERGENCE

Why PRICE is rising and VOLUME rising in the rally?

For price to overcome selling pressure created by

1. Profit-taking selling order
2. New selling order at the market top

What indicates HARMONEY & DIVERGENCE?

It should be noted that the price movement will be in direct proportion to the amount of effort expended.

• If the effort is in harmony with the result it is a sign of the strength of the movement and suggests its continuation. If the effort is in divergence with the result it is a sign of weakness of the movement and suggests a reversal.
• The result tends to be in direct proportion to harmony or divergence. If divergence is suggested, a smaller divergence tends to generate a smaller result, and a larger divergence, a larger result. On the other hand, If harmony is suggested, a greater effort will cause a movement of long duration; while a slight effort will be reflected in a movement of shorter duration

General Rules for Interpreting Volume to determine the health of a trend

1. If PRICE is rising and VOLUME is rising, it means the market is STRONGLY BULLISH.

Volume helps us to determine the health of a trend. An uptrend is strong and healthy if volume increases as the price move with the trend and decreases when the price goes counter-trend (correction periods or ‘pullbacks’).

2. If PRICE is rising but VOLUME is falling, it means the market is WEAKLY BULLISH. Uptrend weakening

When prices are rising and volume is decreasing, it tells that a trend is unlikely to continue. Price may still attempt to rise at a lesser pace, and once sellers take control (which is usually signified by an increase in volume on a down bar or candle), prices will fall

1. If PRICE is falling, VOLUME is rising, the market is STRONGLY BEARISH.
2. If PRICE is falling and VOLUME is falling, the market is WEAKLY BEARISH. Downtrend weakening

Understanding Market Structure through Volume Swing Analysis

The movements of the price do not develop in periods of time of equal duration, but they do it in the swing of different sizes, for this reason, we have to study the relationship between the upward and downward swings

The swing of the market furnishes a clear insight into changes in supply and demand. By learning to judge all sizes (both up and downswings) of market swings, you will gradually learn to spot the time when a rally, and the time when a reaction has stopped and is about to reverse. These are the turning points.

Here we have to find out

1. Strength and weakness of swing through volume analysis or find out harmony and divergence
2. volume analysis at the key level for decision making

Strength and weakness of swing through volume analysis

There are two methods to find out strengths and weaknesses in swing through volume analysis

A Compare the volume of the current price swing with the volume of the previous price swing in the same direction.

This means comparing the current impulse swing vs. the previous impulse swing. What it is telling? Volume increasing or decreasing or the same volume. Let’s understand the divergence

• Compare the volume of UP-swings (A) and upswing (B). Note the decreased VOLUME of the swing (B), indicating a reduction in bullish VOLUME. Weakness is appearing on the bullish side.
• When prices are rising and volume is decreasing, it tells that the trend is unlikely to continue. Price may still attempt to rise at a slower pace, and once sellers take control (which is usually signified by an increase in volume on a down bar or candle), prices will fall
• The move is by short-covering RALLY
• A low volume upswing as the market attempts to rally above these old tops is telling you clearly that the market is not going anywhere
• High volume up bars in the same areas is certainly indicating that there is supply in the market. If the market makers and specialists are still bullish they will have to absorb any supply that appears, this will allow prices to continue up.

Let’s understand harmony

• When comparing current upswing B volume with previous upswing a volume. Note the increasing VOLUME on A swing, indicating an increase in BULLISH STRENGTH. BULLISH price swings are showing signs of strength
• RISING PRICE IS ACCOMPANIED BY RISING VOLUME. It means the market is STRONGLY BULLISH. Price will continue the trend
• High volume up bars in the same areas is certainly indicating that there is supply in the market. If the market makers and specialists are still bullish they will have to absorb any supply that appears, this will allow prices to continue up

Compare the volume of the current price swing with the volume of the previous price swing in the opposite direction.

Means compare impulse volume vs. retrace (pullback) volume. In general, a healthy trend has increasing volume on impulse move and decreasing volume on retrace volume. Let’s understand harmony

• When comparing current downswing B volume with previous upswing A volume. it shows volume decreasing. Strength is now clearly on the bullish side.
• Price movement is expected in the direction of strength. When prices are falling and volume is decreasing, it tells traders that the trend is unlikely to continue in the down direction. Price may still attempt to fall at a slower pace, and once buyers take control (which is usually signified by an increase in volume on an up bar or candle), prices will move up

Let’s understand the divergence

When comparing the current upswing B volume with the previous upswing A volume IT SHOWS PRICE is falling and VOLUME is rising, it means bearish PRESSURE OVERCOME bullish PRESSURE. TREND CONTINUE IN down DIRECTION

Please watch the following video if you want to learn and understand the Volume Price Action Analysis concept in a better way.

In the next article, I am going to discuss Volume Spread Analysis in Trading in detail. Here, in this article, I try to explain the Volume Price Action Analysis in Trading. I hope you enjoy this Volume Price Action Analysis in Trading article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.