Volume Analysis — The One Thing 90% Traders Ignore on Every Chart
Understanding Volume in Trading
Importance of Volume
- When opening a chart, traders often focus on candlesticks or indicators, but the most crucial information—volume—is frequently overlooked.
- Candlestick patterns indicate price movement (up or down), while volume reveals the amount of money and participation behind those movements, determining their authenticity.
Reading Volume on Charts
- The video emphasizes understanding how to read volume on charts and its application in trading strategies.
- Every chart communicates two languages: price and volume. While candlesticks show what has happened, volume tells the story behind those movements.
Scenarios for Analyzing Volume
Scenario 1: High Volume with Big Candle
- A large candle accompanied by high volume indicates strong effort and results; this is a healthy market move that can be trusted.
Scenario 2: High Volume with Small Candle
- If there’s high volume but a small candle size, it signals absorption where buyers are active but being countered by larger players (smart money). This is a warning sign for potential reversals.
Scenario 3: Low Volume with Price Increase
- When prices rise on low volume, it suggests sellers are absent. This situation indicates no supply, allowing prices to increase without resistance.
Summary of Key Scenarios
- High volume with big candles = healthy move.
- High volume with small candles = warning signal for reversal.
- Low volume during price increases = absence of selling pressure.
Volume Spread Analysis
Introduction to VSA
- Many traders may not have heard of Volume Spread Analysis (VSA), which is based on Richard Wyckoff's work and further developed by Tom Williams.
Key Patterns in VSA
Pattern 1: Stopping Volume
- A bearish candle forms amidst panic selling but closes higher than its lowest point with significant volume. This indicates smart money absorbing sell orders, suggesting a potential reversal zone.
Pattern 2: Buying Climax
- In contrast to stopping volume, if prices rise significantly amid bullish sentiment followed by a large green candle with high volume, it may indicate distribution as smart money exits positions while retail traders buy excitedly.
Pattern 3: No Supply Test
- During an uptrend pullback showing low selling interest (small red candle), it confirms that sellers are absent. This scenario presents a good buying opportunity as the uptrend likely continues.
Common Misconceptions About Volume
Understanding Volume Colors
- Many traders mistakenly believe green bars indicate buying and red bars signify selling. However, every trade involves both buyers and sellers; thus, color merely reflects closing positions relative to opening ones rather than control over the market direction.
Volume Divergence Concept
Identifying Market Reversals
- Healthy trends show price and volume moving together; however, divergence occurs when they move oppositely—indicating weakening trends that could lead to reversals.
Practical Steps for Trading Using Volume
Step-by-Step Checklist
- Big Picture Analysis:
- Review overall market participation through higher time frames before focusing on individual candles.
- Level Identification:
- Identify key support/resistance levels and observe how volumes behave at these points using effort versus result concepts.
- Confirmation Wait:
- Avoid immediate trades after breakouts; wait for confirmation through subsequent candles indicating genuine breakout strength or weakness before entering trades.