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Author: Collin Seow   |   Latest post: Thu, 12 Dec 2019, 4:00 PM

 

Using Price Volume Analysis to Forecast Reversals (Examples)

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When it comes to finding their edge in the markets, traders will explore every single tool in the world.

This comes as no surprise, considering the pot of gold at the end of the rainbow is substantial.

One of the earliest tools which traders use to solidify their edge, is Volume.

Even until today, this tool has extraordinary insight to the market analysis.

Many professional traders continue to use volume in their trading analysis.

So what is volume?

Volume is the number of shares that have been traded during a time period, and it truly shows the significance of changes in price.

Volume reveals whether buying or selling interest is rising or falling.

You can basically think of volume as the fuel that drives the market.

The best deals in the market are when you trade side by side with institutional/smart money. Large volumes done in the market are definitely not by retailers such as you and me!

I like to use volume as it tends to be a leading indicator, which can warn of a potential price reversal. Note it does not confirm price reversal but increases the odds of it happening.

Now you must understand that volume price analysis is not a science, but an art.

Which is why automation does not necessarily lend the correct analysis to this.

It might take a little while before you are acquainted with this analysis method, but the rewards are certainly worth its weight in gold.

In this article I'll cut to the chase and show you some of the volume patterns that I use frequently in my trading.

Note that I realize many of you would like the "thesis" or explanation behind these patterns but to me that is not important.

What matters to me is that it works, the rest don't matter!

This is the principle I've learned in professional gaming previously and it's the same core principle that I've brought forward in trading the markets.

If this shit works, don't question or over-analyse, the markets don't care about your thesis or logic!

 

Pattern 1A: High Volume Bars after a Prolonged Downtrend

This is a classic potential reversal pattern.

Stock goes into a prolonged downward trend, significant high volume suddenly comes into play, indicating that the stock’s selling could have reached it’s climax.

It is imperative that after you see this pattern, you must still wait for confirming trend indicators such as moving averages etc. to confirm that the trend has turned before executing the trade.


Pattern 1B: High Volume Bars after a Prolonged Uptrend

Similar potential reversal pattern, but in reverse.

Stock is in a prolonged uptrend, significant volume comes in (use your eyes to spot!), signifying possible early distribution/selling by institutions or smart money.

Rolls over accordingly after Moving averages confirmed the trend reversal.


Pattern 2A: High Volume Bars with Narrow Ranged Bar (During Uptrend)

Another potential reversal pattern, but with stronger warning.

Stock is in a prolonged uptrend, significant volume comes in with the bar having a narrow range/spread.

This is very suspect price volume action and should be taken seriously if you are currently in a long position.

Pattern 2B: High Volume Bars with Narrow Ranged Bar (During Downtrend)

Same as the above pattern, but in the context of a downtrend instead.

Stock is in a prolonged uptrend, significant volume comes in with the bar having a narrow range/spread.

This is very suspect price volume action and should be taken seriously if you are currently in a short position.

And there you have it, 4 examples of how volume can help you predict potential reversals and stronger moves when the trend of the stock/asset changes.

Remember to use these techniques on equities and not Forex as they do not have clean volume information.

There are of course more volume patterns that can be used to augment your trading decisions, but learning and training your eyes on these current patterns will take your trading a long way.

As always, trade awesome!

The post Using Price Volume Analysis to Forecast Reversals (Examples) appeared first on The Systematic Trader | Trading Courses | Collin Seow.

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