So, about volumes then...

This is a funny old game, it really is. One moment everything is as clear as day, and the next I feel like I know nothing.

Today I have been wondering about volumes. Specifically: is it possible to see a correlation between the day's price movement (the length of a candlestick for example) and the volume level? Could we then, in theory, notice deviations from a 'normal' correlation that could supply valuable information?

What's a 'normal correlation' James?

Depends on what one thinks volume is and on where the PV pas de deux takes place, i.e., whether at support or resistance or mid-air.

Yesterday, for example, the NQ tested S twice, at 1425, before lunch (NY). However, the second time, even though it made a "lower low", volume was far less than on the previous attempt. This suggested that selling interest had dried up, making a long a relatively low-risk/high-probability trade.

Yesterday, for example, the NQ tested S twice, at 1425, before lunch (NY). However, the second time, even though it made a "lower low", volume was far less than on the previous attempt. This suggested that selling interest had dried up, making a long a relatively low-risk/high-probability trade.

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Although I dont trade NQ, I agree completely agree with this and I have used similar circumstances for market entry when trading stocks


Paul

Ditto today with 1440, but whenever examples of this sort of thing are provided, somebody shouts "hindsight trading", and the discussion sinks from there.

Mr. B - don't be such a grump. You know very well the circumstances that most real traders call 'hindsight'.

What you have described above is a very useful generic scenario which can be applied in future review of market action, as it unfolds.

As an aside, I don't believe anyone has ever accused you personally of the 'hindsight' issue.

Not grumpy, just experienced

As for the "generic scenario", that's where setups begin.

To (almost) quote H.B. Neill:-

1. Increasing volume during an advance, with intervening pauses or setbacks occurring on light volume. This is indicative of the underlying demand being greater than the supply and favours a resumption of the advance.

2. Increased volume at the top of a rally or of an advance, lasting for some time with no appreciable gain in price is an active churning of stock transactions without progress. This is indicative of a turning point.

3. A tired or struggling advance, when stocks creep upward on light volume and die at the top. This indicates a lack of demand (few buying orders) and whereas selling orders are likewise light, this action frequently marks a "rounding over" turn which may be followed by increasing volume on the down side (when the sellers see they cannot hope for much higher prices). These struggling trends are subject to sudden reversals, particulalrly when they have endured for several days.

These types of action are present, but reversed in sequence, in declining markets.

Thanks TB - yep, these are the basic things I need to remember. It's just that, being me, I like to investigate exceptions and the whys and wherefores (if they exist!).

'What's a 'normal' correlation?' - I'll put it another way: can we ever say that a certain rise in price MOSTLY corresponds to certain amount of volume with this particular stock?

dbp - I have read your .pdfs, and while they are an eye opener, I feel there are some basic things I don't understand (did you get my email BTW?). OK so let's run through this NQ example: the support was tested successfully on lower volume. However, say for example the price movement for this period was smaller than that for previous support test, wouldn't it be possible that the lower volume was merely a reflection of this? To reply to myself, I guess the answer is 'yes, but the smaller price movement is itself an indication of change in confidence' Am I right?

So, let me throw a hypothetical opposite scenario to you. We have a second successful support test that shows the SAME volume as the first, but has a much larger price movement to it (i.e. I would see a bigger candle). As I understand it there could be two reasons for this:
1. Stock has been distributed. More shares are available to sell now, so buyers can seek lower prices.
2. Market makers' discretion.
Discounting the latter as one of those things one can't spot, the former would suggest that prices may not rise far (if at all) from the support. Is that correct?

What about the daytraders churning stock - doesn't this make volume less clearer to work with as well?

It could well be that I am thinking too much here - but I'd like to know the ins and outs of it all....

J.

......... We have a second successful support test that shows the SAME volume as the first, but has a much larger price movement to it .......

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In my view you are comparing the wrong things here. What matters in this case are the preceding volume bars prior to and including the second test of support and not a direct comparison with the first test.


Paul

james6848 said:

Thanks TB - yep, these are the basic things I need to remember. It's just that, being me, I like to investigate exceptions and the whys and wherefores (if they exist!).

'What's a 'normal' correlation?' - I'll put it another way: can we ever say that a certain rise in price MOSTLY corresponds to certain amount of volume with this particular stock?

dbp - I have read your .pdfs, and while they are an eye opener, I feel there are some basic things I don't understand (did you get my email BTW?). OK so let's run through this NQ example: the support was tested successfully on lower volume. However, say for example the price movement for this period was smaller than that for previous support test, wouldn't it be possible that the lower volume was merely a reflection of this? To reply to myself, I guess the answer is 'yes, but the smaller price movement is itself an indication of change in confidence' Am I right?

So, let me throw a hypothetical opposite scenario to you. We have a second successful support test that shows the SAME volume as the first, but has a much larger price movement to it (i.e. I would see a bigger candle). As I understand it there could be two reasons for this:
1. Stock has been distributed. More shares are available to sell now, so buyers can seek lower prices.
2. Market makers' discretion.
Discounting the latter as one of those things one can't spot, the former would suggest that prices may not rise far (if at all) from the support. Is that correct?

What about the daytraders churning stock - doesn't this make volume less clearer to work with as well?

It could well be that I am thinking too much here - but I'd like to know the ins and outs of it all....

J.

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You're asking a lot of questions, all of them hypothetical. In order to find the truth, you'd have to test your hypotheses (or your hypotheticals, if you prefer).

For example, "can we ever say that a certain rise in price MOSTLY corresponds to certain amount of volume with this particular stock?" Well, maybe. Depends on the stock, your definition of "mostly", how much of a rise is a "certain" rise, how much volume is a "certain" amount, and so on. Without any of that, all I can say is "it depends".

As for the pdfs, I'd have to know which ones you've read. I assume you've read only what's available from the Yahoo site. Working from that assumption, I'd have to know what you mean by "larger" price movement. Are you talking about something so large that it amounts to capitulation? Are there downbars preceding that bar? How long? How many? What's the bar/tick interval? And so on.

As for overthinking, probably. If you're still looking at as much as you were looking at last month, then that's too much, though others may disagree. By the time you figure out what it all means, if you ever can, then you will assume greater price risk since price will have moved considerably by then, assuming that the setup was a good one.

If you want to post charts and ask specific questions, I'll provide specific answers. For now, this is the best that I can do.

[Edit: As for the email, yes. Send me a PM.]

dbphoenix said:

You're asking a lot of questions, all of them hypothetical. In order to find the truth, you'd have to test your hypotheses (or your hypotheticals, if you prefer).

For example, "can we ever say that a certain rise in price MOSTLY corresponds to certain amount of volume with this particular stock?" Well, maybe. Depends on the stock, your definition of "mostly", how much of a rise is a "certain" rise, how much volume is a "certain" amount, and so on. Without any of that, all I can say is "it depends".

As for the pdfs, I'd have to know which ones you've read. I assume you've read only what's available from the Yahoo site. Working from that assumption, I'd have to know what you mean by "larger" price movement. Are you talking about something so large that it amounts to capitulation? Are there downbars preceding that bar? How long? How many? What's the bar/tick interval? And so on.

As for overthinking, probably. If you're still looking at as much as you were looking at last month, then that's too much, though others may disagree. By the time you figure out what it all means, if you ever can, then you will assume greater price risk since price will have moved considerably by then, assuming that the setup was a good one.

If you want to post charts and ask specific questions, I'll provide specific answers. For now, this is the best that I can do.

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Thanks guys,
Yes, I agree - I need to address specifics rather than hypothetical situations. 'Tis my nature I'm afraid...

james6848 said:

Thanks guys,
Yes, I agree - I need to address specifics rather than hypothetical situations. 'Tis my nature I'm afraid...

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The process begins with the hypotheticals, e.g., patterns you notice from having observed/studied charts for n days/weeks/months. Then you test it to find out whether it's true or not. If you don't know how to state the proposition, start with a canned pattern, such as the "Ross Hook", or the "Darvas Box", or Dunnigan's "One-Way Formula", or the Opening Range Breakout. Whatever. Doesn't matter. Any starting place will do.

[Edit: I looked you up and now I know what pdfs you're referring to. Given all the charts that are available there, you have plenty of specific examples to refer to.]

dbphoenix said:

The process begins with the hypotheticals, e.g., patterns you notice from having observed/studied charts for n days/weeks/months. Then you test it to find out whether it's true or not. If you don't know how to state the proposition, start with a canned pattern, such as the "Ross Hook", or the "Darvas Box", or Dunnigan's "One-Way Formula", or the Opening Range Breakout. Whatever. Doesn't matter. Any starting place will do.

[Edit: I looked you up and now I know what pdfs you're referring to. Given all the charts that are available there, you have plenty of specific examples to refer to.]

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A specific example:

Prior to the large fall six days before the present, confidence in this stock seemed to be growing (decline flattening out, range getting smaller etc.) could even be called base-ish.

Now, the fall that occured six days ago: was the stock showing signs of a drop, or was it just one of those things?
Does it look like it will rise further now?

My reading is that the second test of support (producing a 'double bottom' if you will) occured on similiar vol to the first. But - the price range is smaller, suggesting that buying pressure is growing. The up bar on the last day confirms this. Now, are we to think that if resistance at 880 is broken, the price will undergo a sharp rise?

james6848 said:

A specific example:

Prior to the large fall six days before the present, confidence in this stock seemed to be growing (decline flattening out, range getting smaller etc.) could even be called base-ish.

Now, the fall that occured six days ago: was the stock showing signs of a drop, or was it just one of those things?
Does it look like it will rise further now?

My reading is that the second test of support (producing a 'double bottom' if you will) occured on similiar vol to the first. But - the price range is smaller, suggesting that buying pressure is growing. The up bar on the last day confirms this. Now, are we to think that if resistance at 880 is broken, the price will undergo a sharp rise?

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What about the people? Price moves because of the people. If you don't understand people, you'll have only a shallow understanding of price.

The present is a culmination of all that has happened in the past. Therefore, you have to start with the seeds of this situation.

Price moved sideways for a time at A. Stock was being accumulated here. Stock was being accumulated further at B, where price also moved sideways. Ditto C. When price attempted a third leg, there were no more buyers and price collapsed.

All the people who bought at D are now underwater. All the people who bought at C are now underwater. Even the people who bought at B are now underwater, though not as much. The only people who are supporting the stock are those who bought at A, except for the novices who are averaging down or who are trying to catch a falling knife.

So what do you suppose all those people who bought at B and who are still holding (which, apparently, is a lot) are going to do when price approaches the 910-930 area? What about those who bought at C? A "sharp rise" is not impossible, but is it probable? As for the last bar "confirming" that buying pressure is "growing", I'm afraid not. If buying pressure were growing, volume would be a lot stronger. As it is, the movement suggests only that selling is, for now, exhausted, enabling price to rise on relatively little demand.

A chart is a series of pictographs, telling a story. A given symbol, viewed in isolation, is essentially meaningless (which is why so many people trade "candles" inappropriately). Only when it is placed in context does it contribute to the story. And if you don't know the story, you will have considerably more difficulty developing possible and probable scenarios for what comes next.

One can also tell the story with "trendlines":

Or support and resistance:

Or one can ignore all of that and trade by price and volume only.

Trying to analyze every bar and PV bar pair is a waste of time, and usually a meaningless activity. Look for the unusual, particularly at "inflection points", i.e., points or levels at which one can expect traders -- particularly beginners -- to be all a-flutter.

After the BO here, there's a downbar -- a marubozu (or "bozo") -- which hits a wall for reasons which are irrelevant. This is followed by an indecision bar which is accompanied by light activity. Big volume comes in thereafter -- lots of selling, lots of buying -- but demand pushes price up off the low, in fact higher than the open. All of this takes place nearer the low of the bar than the high. But the dog doesn't bark, and the trader can relax for the time being.

The next event occurs after price twice tried to emerge to the upside. That didn't happen, so traders look for trades to the downside. This works for one bar, but buyers push price dramatically higher on heavy volume (lots of selling pressure overwhelmed by even more buying pressure). If the candles are blended, the outlook is considerably more positive.

After that, it's just trade management until the next arrow which accompanies a downbar closing off the low. This is followed by another downbar, also closing off its low, but lower than the preceding bar. This is not good. After a feeble attempt at a rally, yet another downbar, this one closing at its low on heavier volume, i.e., lots of activity with selling pressure overwhelming buying pressure. If one needs even more evidence of weakness, yet another feeble rally and yet another downbar, this one longer and also closing at the low. How much does one need?

Then, a "doji" forms, with long tails up and down, conveying the same message that has been telegraphed by the up and down and up and down of the preceding bars. But this particular bar is lower than the preceding bars, not higher. This is followed by yet another indecision bar, and when the captain charges up the hill (the last arrow), he discovers much to his dismay that nobody is behind him.

After that, it's just trade management.

Thanks dbp for all your work.

Now, I do sometimes find what you write confusing. For example, here you are separating out trendlines and s/r lines from the study of pure price/vol. Yet your .pdfs give the impression that price/vol techniques should always be accompanied by trendline and s/r studies.

Also, I have a big problem with this concept of understanding what 'the people' are doing. I have trouble accepting this 'block' behaviour and ascribing a story to a chart, when in reality many people are jumping in and out at different points all the time. Is it really possible to generalise? That's my main issue, I think.

I perhaps give the impression that I understand less than I actually do. It's just that when something's bugging me it sort of takes over everything else...

PV needn't even be accompanied by a chart. Once you've studied this for a while, you'll begin to understand that this is nothing more than a variety of ways of saying the same thing. If you look over these charts again, you'll see that the story is the same; the only differences are in the way in which it's told.

As for having trouble with the concept of understanding what traders are doing, that's not unusual. I don't know many people who are in the first stages of trading who do understand it. Which is one reason why I recommend the Magee book.

Our concepts are constructed on the basis of what we perceive. Right now, you're focused on bars and candles and histograms and indicators. Get rid of the volume and convert your chart to a line-on-close display. Now what do you see?