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THE 1 HOUR TRADE Volume and Price Action

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This may well be the most important chapter in the book. If you understand the analysis of volume and its corresponding price movement, you can apply it to every potential trading setup there is. There is no indicator available that is more effective at showing you where the price of a stock is likely headed than volume when analyzed in relation to the price action associated with it (i.e. the candlestick).

This may well be the most important chapter in the book.
If you understand the analysis of volume and its corresponding price movement, you can apply it to every potential trading setup there is.
There is no indicator available that is more effective at showing you where the price of a stock is likely headed than volume when analyzed in relation to the price action associated with it (i.
e.
the candlestick).

Most traders today treat volume as background information—a mere afterthought to what their technical indicators are telling them.
This is a mistake.
If you are skilled at analyzing price action and volume, you really do not need any other indicators to be successful.

You’ll need to understand candlesticks and what the different candle types signify.
The price action, as detailed through candlesticks, reveals the underlying struggle between buyers and sellers and indicates where price is likely to head.

Since going into detail on the various candlestick types and patterns would take an entire book, we’ll only cover the basics here.
I highly recommend you pick up Steve Nison’s book The Candlestick Course to get a more comprehensive education on the subject.

While reading this chapter, try to gain an understanding of the fundamental essence of the material.
Don’t get too hung up on searching charts for the exact candle types and patterns.
More important than memorizing the different candle types and what they signify is an intuitive understanding of what the individual candle’s various components (upper and lower wicks, real body, red or green) are detailing about the underlying struggle between buyers and sellers.

Candlesticks

Again, here is the anatomy of a candlestick

Candlestick Formation

White or green candles represent a price move higher than the open of the period, while black or red candles represent a price move lower than the open of the period.

Long versus Short

Short candles detail a tightly bound price range between the opening price and closing price of the period, while long candles detail a significant price movement/range between the opening price and closing price of the period.

Long candles (big price movement) associated with large relative volume (big supply/demand) are what you’d expect; this means either the bulls (buyers) or bears (sellers) are firmly in control of the movement.
A high volume of supply from bears would be expected to create a large drop in price.
A high volume of demand from bulls would be expected to create a large rise in price.

In contrast, short candles (little price movement) are what you’d expect with low relative volume (little supply/demand).

What to Watch For

If you see a short candle (little price movement) with high relative volume (big supply/demand), this should cause you concern.

A short candle (little price movement) with large volume (big supply/demand) could mean the current trend is weakening, that the side that was previously in control is running into resistance or support.
The large volume of buying (demand) or selling (supply) isn’t moving the price because the opposite side is coming in strong at that price level and preventing the significant price movement expected.

Conversely, if you see a long candle with low volume, this could signal the move is running out of steam and reaching the final run before a reversal comes in.

Spinning Tops & Doji

Spinning tops are candles that detail large price movement between the high and the low; however, the open and close are closely bound or equal.
Doji are candles that detail a tight range between the high and the low, as well as the open and close.
What these candles are signifying is that there’s a considerable struggle going on between buyers and sellers, with neither controlling the price action.

What to Watch For: Watch for these to signal potential reversals or retracements in either an uptrend or downtrend; it details a struggle over control of the price movement between bulls and bears.
If you see this candle, put your guard up and look for the next candle to confirm the signal.
For example, in an uptrend, if the next candle’s price moves on to break above the recent high, then the bulls regained control, and the trend is likely to continue; a move below the recent low is a good indication the bears took over, and the trend will reverse down until another signal appears and/or the price finds a support level.

Hammer Hanging Man
Hammer & Hanging Man

A Hammer or Hanging Man is a candle with a long lower wick, small real body, and little or no upper wick.
These signal potential reversals.
As you can see from the graphic, the candle is called a hammer when appearing in a downtrend, and a hanging man when appearing in an uptrend.

What to Watch For

Think about why these candles signify reversals; what is happening according to the candle? In a downtrend, the bears control the price action, forcing it down until the bulls say “this price has gotten too low” and take over, forcing the price to recover most of the losses and close near the top, hence the long lower wick and small real body at the top.

Inverted Hammer & Shooting Star

An Inverted Hammer, or Shooting Star, is similar to the Hammer and Hanging Man, the difference being they have a long upper wick instead of a long lower wick.
These signal the same potential trend reversals.

What to Watch For

Again, try to understand what is fundamentally happening under the surface.
During a downtrend when an inverted hammer appears, the long upper wick represents buyer strength coming into play, driving the price up, though giving it away to the sellers to close at the bottom of the price range.
It signals a potential reversal because the buyers are no longer as weak as they have been during the previous downtrend.
The opposite is true of a Shooting Star, which appears during an uptrend.

This should give you enough of a foundation on candles to get you going with the high volume runner setup.
You’ll get better at identifying the underlying action of price movement as you put your analysis into practice.

And remember, it’s more important to understand the essence of what the candles are indicating than to know every different candle type or multi-candle pattern.
As long as you can look at the candles and understand what the components are telling you, you’ll be successful.

Before we move on, and this is important, understand that no single candle should be used to make any decision about entering or exiting a trade—ever.
You must have patience.
You need to consider the whole picture by identifying support and resistance, analyzing the price action and associated volume, and looking at multiple time frames to confirm what is happening and what is likely to happen.

Now on to volume…

Volume – The Only Thing That Matters

I have a trader colleague who is very big on “trading the news.
” He has CNBC constantly running in the background of his office; he has a dozen different internet windows open to all the major financial news outlets.
He believes he can get information through news, which can effectively be used as an edge to trade profitably.

I asked him about it, and he said, “News moves prices.
” I replied, “No it doesn’t; buyers and sellers move prices.
” He rolled his eyes, saying, “You know what I mean; the news causes buyers and sellers to move prices.
” That argument went on, and in fact still does.
In contrast to my colleague’s methods, I have completely abandoned all news sources for trading ideas.

I’ll admit, on a certain level, he’s correct; a piece of news can be used effectively for a profitable trade, as the news causes a large amount of buyers or sellers to come in and move the price.
The momentum that they create can be traded for profit.
However, I argue that the same trade could be had without any knowledge of the underlying news, and that coming upon trades this way—without knowing the news—is much more likely to result in success.
I’ll explain .
.
.

When relying on news for trading ideas, you are making questionable assumptions:

  1. You assume the piece of news you found is significant enough to move the price at all.
  2. You assume you’ve identified the news before the coming price movement, that the market hasn’t already priced the news into the stock.
  3. You assume you’re able to accurately analyze which direction that particular news is going to drive the price.

If the idea is to find news likely to cause enough volume to effect significant price movements, why not just look for the volume, and let that volume and price action dictate what’s likely to happen and, in fact, what is actually happening, so you can plan your entry appropriately?

News can cause large volume spikes, but why waste time and resources and trust your uncertain conclusions, trying to position your entry before a price movement that may or may not come?

Who cares what the news is, if you can find the volume and capitalize on the price movement without it?

Volume never lies.
Volume is much more easily analyzed than news, and scanning for large volume is infinitely less time consuming than scouring the internet for news, which may or may not result in a good trade setup.

Volume reveals the validity of price movement.

It is the great equalizer between insiders and retail investors.
If you know how to find volume and how to analyze volume, almost nothing can be hidden from you—not institutional buying, not underlying bullish or bearish market sentiment, not the likely direction of future price movement.

At a minimum, you need to understand this fundamental idea:

A.
Price movements with high relative* volume should be assumed valid, and price movements with low relative volume should not override what the higher volume price movement is telling you (*”relative” to the average volume for that particular stock).

Here’s a five-minute chart detailing how volume and associated price action detail the likely future movement of price.
The thought progression is numbered.

Although the third candle appears

Although the third candle appears to have a lot of selling pressure with the long upper wick, this is a five-minute chart; when seen through a 1-minute chart, the upward price movement is associated with high volume, and the selling that caused the long upper wick on the five-minute candle is on very low volume when viewed through 1-minute increments.
This is why it is important to analyze volume and price action using different time frames.

There are no hard ratios or indicators telling you when a price move is valid.
You can’t make a decision based on X number of shares traded or the fact that candle was X/Y ratio of average price, etc.

The analysis of price action and accompanying volume is something that you’ll need to practice to get a feel for, but once it “clicks” for you, it will serve you better than any other indicator out there and will help you execute much more successful and profitable entries and exits.

Most traders today treat volume as background information—a mere afterthought to what their technical indicators are telling them. This is a mistake. If you are skilled at analyzing price action and volume, you really do not need any other indicators to be successful.

You’ll need to understand candlesticks and what the different candle types signify. The price action, as detailed through candlesticks, reveals the underlying struggle between buyers and sellers and indicates where price is likely to head.

Since going into detail on the various candlestick types and patterns would take an entire book, we’ll only cover the basics here. I highly recommend you pick up Steve Nison’s book The Candlestick Course to get a more comprehensive education on the subject.

While reading this chapter, try to gain an understanding of the fundamental essence of the material. Don’t get too hung up on searching charts for the exact candle types and patterns. More important than memorizing the different candle types and what they signify is an intuitive understanding of what the individual candle’s various components (upper and lower wicks, real body, red or green) are detailing about the underlying struggle between buyers and sellers.

Candlesticks

Again, here is the anatomy of a candlestick

Candlestick Formation

White or green candles represent a price move higher than the open of the period, while black or red candles represent a price move lower than the open of the period.

Long versus Short

Short candles detail a tightly bound price range between the opening price and closing price of the period, while long candles detail a significant price movement/range between the opening price and closing price of the period.

Long candles (big price movement) associated with large relative volume (big supply/demand) are what you’d expect; this means either the bulls (buyers) or bears (sellers) are firmly in control of the movement. A high volume of supply from bears would be expected to create a large drop in price. A high volume of demand from bulls would be expected to create a large rise in price.

In contrast, short candles (little price movement) are what you’d expect with low relative volume (little supply/demand).

What to Watch For

If you see a short candle (little price movement) with high relative volume (big supply/demand), this should cause you concern.

A short candle (little price movement) with large volume (big supply/demand) could mean the current trend is weakening, that the side that was previously in control is running into resistance or support. The large volume of buying (demand) or selling (supply) isn’t moving the price because the opposite side is coming in strong at that price level and preventing the significant price movement expected.

Conversely, if you see a long candle with low volume, this could signal the move is running out of steam and reaching the final run before a reversal comes in.

Spinning Tops & Doji

Spinning tops are candles that detail large price movement between the high and the low; however, the open and close are closely bound or equal. Doji are candles that detail a tight range between the high and the low, as well as the open and close. What these candles are signifying is that there’s a considerable struggle going on between buyers and sellers, with neither controlling the price action.

What to Watch For: Watch for these to signal potential reversals or retracements in either an uptrend or downtrend; it details a struggle over control of the price movement between bulls and bears. If you see this candle, put your guard up and look for the next candle to confirm the signal. For example, in an uptrend, if the next candle’s price moves on to break above the recent high, then the bulls regained control, and the trend is likely to continue; a move below the recent low is a good indication the bears took over, and the trend will reverse down until another signal appears and/or the price finds a support level.

Hammer Hanging Man
Hammer & Hanging Man

A Hammer or Hanging Man is a candle with a long lower wick, small real body, and little or no upper wick. These signal potential reversals. As you can see from the graphic, the candle is called a hammer when appearing in a downtrend, and a hanging man when appearing in an uptrend.

What to Watch For

Think about why these candles signify reversals; what is happening according to the candle? In a downtrend, the bears control the price action, forcing it down until the bulls say “this price has gotten too low” and take over, forcing the price to recover most of the losses and close near the top, hence the long lower wick and small real body at the top.

Inverted Hammer & Shooting Star

An Inverted Hammer, or Shooting Star, is similar to the Hammer and Hanging Man, the difference being they have a long upper wick instead of a long lower wick. These signal the same potential trend reversals.

What to Watch For

Again, try to understand what is fundamentally happening under the surface. During a downtrend when an inverted hammer appears, the long upper wick represents buyer strength coming into play, driving the price up, though giving it away to the sellers to close at the bottom of the price range. It signals a potential reversal because the buyers are no longer as weak as they have been during the previous downtrend. The opposite is true of a Shooting Star, which appears during an uptrend.

This should give you enough of a foundation on candles to get you going with the high volume runner setup. You’ll get better at identifying the underlying action of price movement as you put your analysis into practice.

And remember, it’s more important to understand the essence of what the candles are indicating than to know every different candle type or multi-candle pattern. As long as you can look at the candles and understand what the components are telling you, you’ll be successful.

Before we move on, and this is important, understand that no single candle should be used to make any decision about entering or exiting a trade—ever. You must have patience. You need to consider the whole picture by identifying support and resistance, analyzing the price action and associated volume, and looking at multiple time frames to confirm what is happening and what is likely to happen.

Now on to volume…

Volume – The Only Thing That Matters

I have a trader colleague who is very big on “trading the news.” He has CNBC constantly running in the background of his office; he has a dozen different internet windows open to all the major financial news outlets. He believes he can get information through news, which can effectively be used as an edge to trade profitably.

I asked him about it, and he said, “News moves prices.” I replied, “No it doesn’t; buyers and sellers move prices.” He rolled his eyes, saying, “You know what I mean; the news causes buyers and sellers to move prices.” That argument went on, and in fact still does. In contrast to my colleague’s methods, I have completely abandoned all news sources for trading ideas.

I’ll admit, on a certain level, he’s correct; a piece of news can be used effectively for a profitable trade, as the news causes a large amount of buyers or sellers to come in and move the price. The momentum that they create can be traded for profit. However, I argue that the same trade could be had without any knowledge of the underlying news, and that coming upon trades this way—without knowing the news—is much more likely to result in success. I’ll explain . . .

When relying on news for trading ideas, you are making questionable assumptions:

  1. You assume the piece of news you found is significant enough to move the price at all.
  2. You assume you’ve identified the news before the coming price movement, that the market hasn’t already priced the news into the stock.
  3. You assume you’re able to accurately analyze which direction that particular news is going to drive the price.

If the idea is to find news likely to cause enough volume to effect significant price movements, why not just look for the volume, and let that volume and price action dictate what’s likely to happen and, in fact, what is actually happening, so you can plan your entry appropriately?

News can cause large volume spikes, but why waste time and resources and trust your uncertain conclusions, trying to position your entry before a price movement that may or may not come?

Who cares what the news is, if you can find the volume and capitalize on the price movement without it?

Volume never lies. Volume is much more easily analyzed than news, and scanning for large volume is infinitely less time consuming than scouring the internet for news, which may or may not result in a good trade setup.

Volume reveals the validity of price movement.

It is the great equalizer between insiders and retail investors. If you know how to find volume and how to analyze volume, almost nothing can be hidden from you—not institutional buying, not underlying bullish or bearish market sentiment, not the likely direction of future price movement.

At a minimum, you need to understand this fundamental idea:

A. Price movements with high relative* volume should be assumed valid, and price movements with low relative volume should not override what the higher volume price movement is telling you (*”relative” to the average volume for that particular stock).

Here’s a five-minute chart detailing how volume and associated price action detail the likely future movement of price. The thought progression is numbered.

Although the third candle appears

Although the third candle appears to have a lot of selling pressure with the long upper wick, this is a five-minute chart; when seen through a 1-minute chart, the upward price movement is associated with high volume, and the selling that caused the long upper wick on the five-minute candle is on very low volume when viewed through 1-minute increments. This is why it is important to analyze volume and price action using different time frames.

There are no hard ratios or indicators telling you when a price move is valid. You can’t make a decision based on X number of shares traded or the fact that candle was X/Y ratio of average price, etc.

The analysis of price action and accompanying volume is something that you’ll need to practice to get a feel for, but once it “clicks” for you, it will serve you better than any other indicator out there and will help you execute much more successful and profitable entries and exits.

この記事を書いている人 - WRITER -

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