It's astonishing to see many traders analyze volume in the wrong manner.
It is difficult to understand why many people fail to see what's happening in the chart w.r.t price and volume.
Most of us know the traditional definition of volume. If you don't know it, below is the conventional definition of volume.
As per the traditional definition, if the price increases with an increase in volume, then it is bullish. If the price increases without volume, it is bearish (or not bullish).
Similarly, if the price is falling with an increase in volume, then it is bearish, and if the price is falling without volume, then it is bullish (or not bearish).
But it is not easy to agree with the above definition as the charts say something else!
Let us look at some charts.
In the above chart, the price has gone up with medium volume.
In the above chart, the price has rallied from 3100 to 4500, and the complete rally witnesses negligible volume.
Do you think these are some cherry-picked operators' stocks?
The above charts are ACC and Ultra Tech Cement charts.
It is easily understandable that these points bring a lot of doubt and uneasiness as they shake the basic foundation of 'volume' itself.
We will look at some charts on the index itself (at least no one can operate it).
The above chart is the Nifty Futures Daily chart. The price has rallied from 7400 to 11400 with a reduction in volume.
The above chart is a Bank Nifty Futures Daily chart which shows that the price has rallied upside with the reduction in volume.
I hope these charts and explanations will raise questions in your mind about traditional volume definition.
I have not written this post to scare any of you, but to present my findings of 'volume' as it is, and it is straightforward:
The price can go with more volume, medium volume, and less volume.
The price can go down with more volume, medium volume, and less volume.
Please don't believe these statements. Refer to some charts and observe the relationship between "Price" and "Volume." You will get the idea!
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Volume and Color Code
The introduction of online colorful candlestick charts changed how people manage their trades. Without any doubt, it provides much information to the traders.
However, many traders don’t see things as it is and make many assumptions by looking at the green-red color combination.
Now, a simple chart to test your understanding of volume.
Observe image 6, A resistance trend line and price opened and closed above the trend line with a significant volume spike.
So, in your opinion, who has significant participation in the volume? Buyers or Sellers?
If your answer is ‘Buyers,’ then there is a severe mismatch between your understanding and reality because you are giving more importance to the volume spike's ‘green’ color code.
Do you agree that the resistance area belongs to the sellers?
Sellers should be absent above the resistance line to give further move on the upside.
But look at the breakout candle carefully. It has a selling wick that is about 70% of the body. It means 70% of them are sellers.
You have developed a bullish view after looking at the big green color volume spike. Isn’t it?
Does it make sense?
Look at image 7, and what is your view on the volume spikes ‘A’ and ‘B’?
The price candle corresponding to the ‘A’ volume spike contains a selling wick of 40%; hence, there are 40% sellers in the ‘A’ volume spike.
The price candle corresponding to the ‘B’ volume spike contains a selling wick of over 60%; hence, there are 60% sellers in the ‘B’ volume spike.
Do you agree?
After clearing these significant misconceptions about volume, I can explain how I analyze the price-volume relationship.
Image 8 shows a daily chart of Gillette India, and now the price is near the support trend line.
Besides, it also displayed a bullish engulfing pattern (not 100%, but it is close). Do you think the price will go upside from here?
To decide whether the support will hold or not through ‘volume,’ we need to analyze the significant volume spikes.
I have marked Nine significant volume spikes on the chart, and I analyze these spikes below:
Spike 1 – It has some buying wick, but the price didn’t go up. Hence, I mark this spike as neutral.
Spike 2 – No wick, but the price fell on the next day. Hence, I mark this spike as bearish.
Spike 3 – Again there is a big selling wick, and also the price fell later. Hence, I mark this spike as bearish.
Spike 4 – Not much wick, but the price fell on the next day. Hence, I mark this spike as bearish.
Spike 5 – Big selling wick, but the price went on sideways for the next day. Hence, I mark this spike as bearish.
Spike 6 – There is a slight buying wick, but the price fell on the next day. Hence, I mark this spike as neutral.
Spike 7 – Slight wick on both the side and the price went upside on the next day. Hence, I mark this spike as bullish.
Spike 8 –Wick on both sides, but the price fell on the next day. Hence, I mark this spike as bearish.
Spike 9 –No wick on both sides, but the price fell on the next day. Hence, I mark this spike as bearish.
Now, there are 9 volume spikes in total. Among 9, there are 6 bearish volume spikes, 1 bullish spike, and 2 neutral spikes.
Hence, there is a high probability of the price breaking the support trend line.
You can look at the result in the below image.
This is how I analyze the “price-volume” relationship before taking any trade.
After many years of observation and practice, I have developed this unique way of analyzing 'volume' in trading, and I call it "Advanced Volume Analysis."
I have explained it in my Price Action Trading Course'.
Below are some of the reviews from the participants:
If you are interested to learn this unique way of price-volume relationship, register for 'Price Action Trading Strategy Guide.'
Please feel free to ask any questions in the below comment box. I am happy to answer.
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