Volume Price Analysis

  • July 7, 2020

Investors and traders alike rely heavily on indicators to guide their trading decisions. But how does one choose from the 100's of indicators and strategies available? Is one better than another? What about volume price analysis?

volume price analysis

What if I told you one of the most underrated and overlooked strategies is also one of the most powerful? That my friend, is volume price analysis and it's incredibly simple. However, if you can see beyond its simplistic nature, you'll discover that this trading technique is incredibly valuable!

What Is Volume Price Analysis?

  • Let's start with a quick crash course on the market, supply and demand. An understanding of the imbalance between supply and demand can serve as a fundamental factor in making better trading decisions. When market conditions are entirely normal, supply and demand have the most significant impact on commodities. If more of a good is needed and the supply is dwindling, the price will invariably go up. The opposite is also true; when supplies are high, but demand is low, prices tend to go down. 

This is true for the financial market as well. If you trade in the foreign exchange market, any increased demand for dollars will cause the dollar's price to rise in relation to the value of other currencies.

What volume price analysis does is it allows you to look deeply into market structure and grasp processes that move a price. With that information, you can guide your trading decisions.

Experts have discovered that people who make informed trading decisions that include a thorough review of price volume tend to be more successful than traders who do not analyze this indicator.

1. Volume Predicts the Future (Sort Of)

If we all had crystal balls that predicted market moves, we'd all be millionaires. Volume is the next best thing to a crystal ball.

Beyond determining whether a market is bearish or bullish, it tells you what traders will be doing in the minutes, hours, and days that lie ahead. 

With great information, you can make timely and strategic trading decisions that help you come out as a winner. More importantly, there may be developments, actions or activities on the part of companies that have triggered significant moves in volume.

In a sense, this indicator gives you a heads up that there is more research to do. You could say if you were looking for stock market jobs, volume price analysis could be helpful.

2. Two Main Market Phases: Accumulation & Distribution

Like most things in life, the structure of the commodity market is cyclical in nature. In fact, we can break the cycle into two distinct phases, alternately passing through each other:

  • Accumulation phase (balance)
  • Distribution phase (imbalance)

A struggle between buyers and sellers characterizes the Accumulation phase. Traders are entering positions that eventually turns the "balance" state into one of "imbalance."

At this point, one side begins to dominate, either buyers or sellers; i.e. a bull vs bear market. Volume price analysis can help determine that.

It's worthwhile to note that this process is spontaneous in nature; and it's duration varies. Ultimately, the end result is always the same: a transition to the distribution stage.

volume price analysis

Once the balance scales are tipped, we enter the Distribution phase. A telltale characteristic of this phase is a rapid price change. At this point, buyers or sellers are strongly dominating the market, pushing the price up.

Eventually, we cycle back into the accumulation phase as buyers and sellers search for a fair price again.

However, the distribution stage does not always stem from the accumulation stage. A classic scenario is the release of some fundamental catalysts like economic or financial news that impacts trading decisions.

Not surprisingly, news like interest rate changes, earnings releases and new product announcements all impact traders' decisions. And we see this impact in the form of imbalance in the market.

A rising A/D line helps confirm a rising price trend. A falling A/D line helps confirm a price downtrend..”

How Do You Read Volume Price Analysis?

  • The A/D is considered strong if there is a wide range between an asset's price at market open and market close. Traders, however, should also consider the patterns made by the highs and lows of the A/D indicator. Rather than movements reflecting individual assets, currencies, or commodities, they can also indicate a low, upward trending market in general. It's important to note that there are times when asset volumes rise ahead of any sharp sell-offs, which can create a strong diversion. When this is the case, volume indicators, like volume price analysis, will need to be used along with other signals; such as other fundamental and technical indicators. 

1. Let's Talk About the On-Balance-Volume Indicator

Developed by Joseph Granville in 1963, the on-balance volume (OBV) indicator is a technical trading momentum indicator.

OBV uses the previous day's price movement to predict stock price. The indicator will move, whether higher or lower, long before the actual prices start moving.

By looking at whether prices rose or fall, you can make educated decisions in the current day's trading decisions. 

In this strategy, you can find a buying opportunity via a new high that indicates a bullish market rather than a bearish one. An on-balance volume that's lower will indicate a bear market.

Furthermore, shifts in divergence or price can be identified when the on-balance volume signal is different from an asset's actual market price.

2. Why Is Volume So Incredibly Important?

There are two primary reasons why volume is so incredibly important. To start, it offers a window into the minds and hearts of other traders.

It's excellent for identifying fear that might incite rapid sell-offs and significant price changes. Likewise, paying attention to this factor is the easiest and most effective way to identify trends on your own.

3. Volume Price Analysis Will Always Perfectly Reflect Price

This number reflects the total sum and the total value of every transaction at a specific point in time. The volume indicator will always perfectly reflect the price. 

In fact, if you've been using candlestick charts, you'll find this tool to be infinitely easier to leverage. If you've been wanting to learn how to read candlestick charts but have had only nominal success, using this indicator is a far better choice.

You'll have a clearer understanding of what you are looking at; and a much easier time interpreting the data and putting your idea in action.

4. Volume Tells Us If the Market Is Bullish or Bearish

Volume verifies trends. When asset prices rise with a large volume, this means that a trend is strong. To put it plainly, this is a bullish signal.

Conversely, if there's high volume and the asset price drops, you know that people are selling their stocks off. In other words, it can inform your movements so that you're able to mitigate your losses by taking timely action.

volume price analysis

What Is a Good Trading Volume?

  • Volume is a great trading tool. Therefore, volume price analysis is a great technical indicator. 20 million in volume is a good general rule of thumb. The more volume, the more liquidity. The more liquidity, the better your entries and exits fill.

1. Volume Price Analysis Confirms Patterns

Various chart patterns can be confirmed by volume as well. These include head and shoulder patterns, flags and triangles.

In fact, most seasoned traders use volume when attempting to make these confirmations. When volume is high, the formation of chart patterns is easy to identify and confirm. 

2. Volume Displays Emotions

Volume remains one of the most important and valuable psychological indicators available. It allows traders to see when others are anxious and fearful, and above all, ready to sell-off.

It additionally helps people spot possible price hikes due to bullish trading. This tool is especially important for day traders who require comprehensive and real-time information.

Your Next Steps?

As you can see, volume truly is the closest thing you'll get to a crystal ball in trading. How you use volume is up to you but volume price analysis is a must for any successful trader.

Don't be afraid to try. Like it or not, there's a certain amount of trial and error inherent in the process of trading. Bullish Bears will provide you the guidance you need to get started in your trading journey. 

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