The process of analysis is exactly the same as in our previous example, and you can think of this as starting at the micro level, and then gradually moving to the macro level. It is rather like zooming out with a camera lens. We start focusing on one candle and one volume bar. We then move further out to focus on groups of candles to compare their respective volume and price action, before finally we look at the big picture.
This will confirm if we are in an up trend, down trend or congestion phase. In other words we ‘frame’ the whole volume price relationship in the context of where we are in the trading journey for the market. As you will see shortly, we then bring in other techniques and tools to help us as part of the volume price methodology.In Fig 6.16, once again candle 1 is in agreement with the volume, which is below average and as expected.
There is no anomaly here. Candle 2 then closes with a slightly wider spread, and higher volume. Again all is in agreement. But now the market is starting to fall fast, and in candle 3 we close with a tall body to the candle. Volume is also high and confirming the price action. The selling is in full flow as the market plunges lower. Then in candle 4 we see our first anomaly. The price action and volume are no longer in agreement.
Here we have a short body on the candle, but the volume is higher than on the previous bar.Selling pressure is starting to be absorbed as buyers come into the market at this level. The buyers are primarily the insiders as the volume is very high, and they are now buying as the retail traders sell. The retail traders are expecting a further move lower and do not wish to miss out on some ‘easy profits’.
But how do we know the insiders are buying? If this had been primarily selling volume, the market would have closed with a very wide spread down candle, and certainly wider than candle 3. It has not. The falling price has been halted. Panic selling is now happily being absorbed by the insiders, and this is the first signal the current down trend is potentially coming to an end. Candle 5 gives us an even stronger signal and confirms candle 4.
Here we have ultra high volume associated with a hammer candle. Another of our ‘premier’ candles. The price action alone is telling us there is potential buying at this level. The volume is confirming this loud and clear, and also telling us the insiders are buying given the associated volume, which is extreme.Candle 6 confirms this further with a further anomaly. A narrow body on the price action, but high volume. This is further buying by the insiders, as the retail traders continue selling on the expectation of a further move lower.
The insiders however have other ideas.The market here is starting to bottom out, but this may take some time, particularly if it has been a dramatic fall. As I always try to explain a market always has momentum, whether in an up trend or a down trend. The analogy I always use is that of an oil tanker. If the engines are stopped the oil tanker would continue for several miles under its own momentum. The market is the same.
It will rarely reverse on one candle. What generally happens is the market trends strongly, and in this case downwards, and the insiders move in.The insiders cannot hope to absorb all the selling pressure in one candle. It takes several attempts and at this stage the market is likely to consolidate and trade in a relatively narrow range. It’s what I refer to as the ‘mopping up’ operation. It is much like mopping up water with a sponge.
It takes two or three passes to dry any spill. The same applies at the top of an uptrend. The insiders are selling into waves of buying from the retail traders, and this up and down price action which then becomes a congestion phase, is simply the insiders mopping up the last of the buyers. I hope in the above examples I have managed to convince you of the power of volume price analysis. It is a relatively simple concept developed over 100 years ago.
It helped many of the iconic traders of the past to build their fortunes, using nothing more than the ticker tape, which displayed just two indicators. Price and volume. For us the glue that binds price and volume together is the candle, which then provides the graphical tool for our analysis.In the context of binary options, timing is everything. And whilst we may see an initial signal of a reversal this may take time to develop fully.
This is one of the many reasons why you need to have time on your side, and also consider longer term options. Timing a decision within a one hour timeframe is hard. Timing it within a few hours or daily is much easier.To round off this introduction to volume price analysis, there are two other techniques which we apply to complement this approach. The first of these is in analyzing candle patterns, and the second is in consider ume together is the candle.