Understanding Price & Volume relationship – Article by @PAVLeader

Understanding Price & Volume relationship

Today I am going to share my experience on Price & Volume trading. The objective is to learn the power of using Volume in
your day to day trading to spot high probability trades & to be on the right side of the market always. This learning also
helps in following the footprints of Smart Money which every trader yearns for. Here is the agenda of this article –

1) What is Volume & why it is important

2) Understanding Volume with few practical examples
3) Understanding 3 key rules of Wyckoff
4) Understanding 7 KEY ELEMENTS of candlestick
5) Understanding how Volume affects Price (Normal Vs. Abnormal behavior)
6) 10 Golden Tips
7) What to look for in a chart for Price & Volume analysis
8) Explanation via Charts

What is Volume & why is it important?

Volume shows the overall activity (buy & sell) happening on a particular time frame. It exhibits the interest people are
taking at a particular price level which acts as a force to move price up or down. More people interested to buy at a
particular levels shows demand & more people interested to sell shows supply. This is an indicator to display balance or
imbalance in supply & demand.

In other words, price is used to advertise Value which attracts Buyers or Seller depending on at which price they see Value.
Let’s say on an Electronics store, items are being sold at MRP therefore, less people (less volume) are interested but if they
offer 50% discount, then more number of people will show interest to buy. This is called more Volume.

Understanding Volume in simpler terms

Assume a group of 3 people (A=100Kg, B=75Kg & C=50Kg) plan to climb a mountain. They are very excited, super charged
with full of energy & zeal at the beginning of climbing. As they are fresh, they cover good distance in a short time. They
took rest in between, had refreshments & continued the journey however, as they are getting exhausted on energy &
resources their speed started slowing down. On top of it, the sun (external factors) started draining them faster & they
gave up any further climbing & they halted their journey.

What will happen next? Since they can’t climb any further, they will fall & roll down on their own weight. Right?

Who will reach the ground first? The person will more weight will roll down faster than the person will lesser weight. So A
will reach faster than B & C, B will reach faster than C & C will reach last.

This is exactly what happens to price when volume is linked with it. During the fall if volume is more (person A) the price
will fall faster & if volume is less (person C) it will fall but slower. Hope you are getting the point now.

You can use the same example with a Big & heavy stone Vs. Small & lighter stone.

Understanding Wyckoff 3 rules

Now let’s understand the 3 fundamental rules of Richard D Wyckoff –

1. The law of Supply & Demand : When demand is greater than supply, then prices will rise to meet this demand, and
Conversely when supply is greater than demand then prices will fall, with the oversupply being absorbed as a result.

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2. The law of Cause & Effect: In order to have an effect, you must first have a cause & the effect will be in direct proportion to
the cause. In other words, a small amount of volume activity will only result in a small amount of price action. If the cause
is large, then the effect will be large as well. If the cause is small, then the effect will also be small.
3. The law of Effort vs. Result: The price action on the chart must reflect the volume action. The two should always be in
harmony with one another, with the effort (which is the volume) seen as the result (which is the consequent price action).
If they don’t then there is anomaly & we have to spot such anomalies to trade right.

Understanding 7 KEY ELEMENTS of candlestick

Before we go any further, let’s understand the components of a candlesticks. There are 7 key elements which you should
be aware of –
1. Open
2. High
3. Low
4. Close
5. Upper Wick
6. Lower Wick
7. Spread or Range (Body size)

For Bearish Candlestick just swap Open & Close & color of candle will become Red.

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 Understanding Price & Volume relationship – Article by @PAVLeader

Validation of Normal vs. Abnormal Volume

Going by the 3rd law of Wyckoff, efforts vs. result should always be in harmony. It means that the spread of the candle
should be aligned with the associated volume. If it is not, then there is a problem & we should suspect the move. Simply
put, if a weak person is winning a 100 meter sprint then he must be on steroids.

There are various scenarios which you should be familiar with to understand this concept better. I have prepared some
notes from Anna Coulling’s famous book (A Complete Guide to Volume Price Analysis) to explain this concept better. Have
a look –

Let’s understand the above chart in table format for easy reference –

Spread Volume Behavior

Wide High Normal
Narrow Low Normal
Wide Low Abnormal
Narrow High Abnormal

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 Understanding Price & Volume relationship – Article by @PAVLeader

Price Spread Volume Behavior

Rising Increasing Rising Normal
Falling Increasing Rising Normal
Rising Increasing Fading Abnormal
Falling Increasing Fading Abnormal

10 Golden Tips

Smart money is smart enough to manipulate a stock but they always leave trails or footprints of their actions. All we have
to do is learn how to spot those & aligned our trades with them. Here are 10 GOLDEN tips based on my experience & study
of price & volume analysis –

1) Prices should rise with steady volume in an Uptrend & should fall with steady volume in a Downtrend. This is absolute
normal behavior & if they don’t exhibit this behavior then there is something abnormal & we should look out for those
symptoms for high probability trades.
2) If a price rises with above average volume & wide spread, expectation is that follow up bar would be higher &
proportionate to the volume associated with it. If there is no follow up buying bar, then suspect that behavior & stay
alert in your longs.
3) Vice versa is applicable for shorts (if price don’t fall further after a wide range bar then the selling is absorbed by strong
hands so be cautious). If after a wide range bar, price don’t fall further & makes an inside bar with 50% or more
volume than wide range bar, then avoid shorts & wait for next bar. In this case, the low of Inside bar and Wide Range
Bar is important. If it doesn’t break, then in all probability price may start rising because the selling is absorbed by
strong hands.
4) If price penetrates a previous high & closes off the high with upper wick, then there is a selling behind so watch out for
the area covered by the wick. Expectation is that any time price will approach that area, bears will beat them again.
This continued price rejection (1-3 times) can let a stock fall furiously). Also if next bar closes below the last bar (with
wide range & more volume than previous bar) then retailer are trapped & more selling to follow.
5) If you see a Pin Bar with double the average volume in demand zone or new lows, then most likely it is buying & price
should rise. Similarly, if you notice inverted hammer or Gravestone Doji in Supply zone or in new highs with 2 times of
average volume, then there is a possible fall due. Watch out for follow up bars.
6) After a huge sell-off (Wide range bar with massive volume) price takes some time to consolidate & accumulate before
rising up (if it was a real accumulation). First rally will fail most of the times (V shape bounces are rare) so price is likely
to come back & test the recent lows made. This happens to test the floating supply to shake out weak hands.
Sometimes it may break the lows with lower volume & price immediately bounces back up within the zone. This
happens to hunt the stops & remove the weak buyers. After that watch out for low volume test bars for supply which
typically is the final phase before the shoot up of price.
7) When you see a long upper wick with ultra-high volume (minimum 2-3 times of 20MA) & price closing in the below
50% zone of the candle, it means huge supply was offloaded to retail by Smart Money. Any rise to that area (with less
volume & weak candles closing off the highs) would attract more selling & shorts can be initiated based on price
rejection patterns. Reverse is true for Bullish setup where long lower wick is seen with ultra-high volume. Any low
volume test can be used to go long with proper price confirmation.
8) For successful breakout trades (range breakout, trend line breakout or any other form), volume should be higher at the
breakout levels & lower on pullbacks. If this is not the case, chances of failures are more.

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9) Remember, in a strong downtrend, after the 1st time brakes are applied, price sometimes takes 2-4 attempts before a
reversal happens. Watch out for how price is approaching EMA21 after the initial brakes are applied (strong cases price
won’t even touch EMA21 & fall further). Notice the volume on up bars vs. down bars. Notice the size of candles &
finally notice the low volume test of last supply zone. Volume should be lower compared to last time price approached
this level. Reverse attributes are true for Uptrend to downtrend reversal cases.
10) 1st attempt of Breakouts (break of support or resistance) normally are weak whereas 2 nd or 3rd time are powerful & you
have something to compare with. Therefore, probability of 2nd time or 3rd time is higher than 1st one. Practice patience
to spot these & enter with more confidence.

What to look for in a chart for Price & Volume analysis

1. Define the trend & draw key supply & demand zones. This sets the context & playground to play. Have 200-250 bars on
the chart to have bigger picture.
2. Notice the spreads & associated volume near those zones. This will help you get signal bar & area of interest.
3. If you see Wide Spread Bar with volume at least twice the average volume of 20 days (more the better), pay attention to
it. This means something is happening by Smart Money & this level should be of your interest to find a suitable trade
for you. Always trade where there is action. This is your Signal bar.
4. If this Signal bar is in the supply zone (look to the left & see if previous sell-off happened from this zone & if prices
were rejected from this zone). Notice the spread, volume & close of the bar. It will tell the story in itself & most of the
times clears the intent of Smart money.
5. Watch closely following 2-5 bars (sometimes it takes more) to see the follow up reaction & your favorite trade might
be developing in those bars.
6. Now you know the intention, you price action & key levels to take your trades.

Let’s see some charts with examples

Chart 1: INDUSINDBK Part 1

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 Understanding Price & Volume relationship – Article by @PAVLeader

Chart 2: INDUSINDBK Part 2

Chart 3: TATASTEEL

Thank you for your time. I hope this article was helpful in analyzing price action with volume to improve your
accuracy & timing. Practice more & get more confidence. All the best & happy learning!

@PAVLeader