Price and volume elasticity

My point however is this. Considering volume in isolation is meaningless. It is simply a statistic from which little information can be gathered other than in a comparative sense. We can compare this week with last week, or today with yesterday for a sense of whether volumes are higher or lower, but little else. It is only when we begin to analyze volume with price that its immense power is revealed.Finally, there is one further aspect to volume, and it is this.

It is a leading indicator. It reveals activity in real time. If we have a shop we can see the cash register ringing up the sales. A coffee shop will be busy in the morning, then quiet, then busy at lunchtime with queues of people waiting to be served. Volume is activity and activity is volume. It is visible, simple, instant and when combined with price action, is the catalyst for volume price analysis – an explosive combination.Now let’s consider price, the second part of our chemical reaction.Why Price?To answer this question, price is once again a leading indicator.

For a split second it represents every aspect of risk and market sentiment before moving on again. The price represents all the buying and the selling, the economic news, the balance of fear and greed, risk and reward and of course, consequent returns. Technical analysis and the study of price action is premised on this fact, and is a fundamental tenet of trading. Over the last few years we have seen a strong move towards price action trading or PAT. In principle this sounds a perfect way to analyze market behavior.

After all if we believe a price chart displays all this sentiment why not simply trade using price alone?And to answer the question let me create a visual picture for you with the following analogy. It is not perfect, but I hope it will make the point.Imagine for a moment you wish to buy an item at auction, but cannot attend on the day of the sale. Instead, you contact the auctioneer and agree to bid by phone. The bidding starts and the price begins to rise.

You start to bid, but have no idea whether you are bidding against one person or several people, as you cannot see the auction room. Indeed, you have no idea whether the auctioneer is taking bids ‘off the wall’ – false bids – to drive the price higher, which does happen. Suppose the price is moving higher quickly. You would assume, possibly correctly, it was being driven higher by the number of bids in the room.

But there is no way you could be sure. The only way you could be certain is if you were in the room, and able to see the number of bids. This would give you the confidence to know the price was being bid higher by genuine bids.Price on its own is just that – a price. The market may be higher or lower than it was a few minutes ago, and indeed the analysis of historical price patterns and candles is an important part of the volume price methodology, but without volume it is weak. Price validates volume and volume validates price.

In my humble, opinion trading on price alone is akin to bidding blind. You cannot see whether the price is being driven by genuine bidding or by false bidding, and this is why VPA can be the key to your success.Every market is driven by insiders, the professional money, the smart money, the big players. Call them what you like. In equity markets it is the market makers, in the futures markets it is the big operators, in the forex market it is the banks in the interbank liquidity pool.

These are the major players who manipulate and move the markets using a variety of mechanisms including the media. The constant flow of news, stories, economic statements and releases, gives the insiders the perfect tool. Every opportunity is taken to shake traders out of the market through the manipulation of price, both large and small, and for evidence of this we need look no further than the monthly NFP (Non Farm Payroll) release.

This follows a similar pattern month in and month out. The news is released, and the market reacts strongly in one direction. Minutes later, the market reverses and moves in the opposite direction. Why? The reason given by the media (as they cannot think of anything else) is the market reacted first to the headline numbers.

The subsequent reaction is as a result of a more considered view of the detail buried deeper in the report. The real reason is the insiders are using this release as an opportunity to trigger stops.The insiders of course will always attempt to hide their activities, but there is one indicator that reveals everything, and it is volume. Volume reveals activity.