In this set of articles we’re going to be looking at some key tools and different practises that can improve your chart reading skills and your trading overall.
Part 1 – Volume
It is essential to look at volume when analyzing the charts. Volume equates to activity: it is either the number of contracts placed to the market during the duration of the bar (in the case of exchange volume ) or the number of price changes during the duration of the bar (in the case of tick volume)
It shows when and how the professionals (or as they are called in Wyckoff Volume Spread Analysis, the smart money) are acting. If the volume is relatively big, the smart money is buying or selling. Low volume means they are not interested.
So volume is one of the tools that not only helps us to understand what is happening on the chart, but also helps traders avoid serious mistakes in determining the further direction of the price movement.
Take a look at the Estee Lauder Companies, Inc (NYSE:EL) stock as an example.
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This stock was in a downtrend from August 2022. On October 20th 2022 we saw the first significant increase in volume on a down bar (the bar with its close price lower than the close price of the previous bar) followed by another price bar with big volume on the 24th of October and then by the huge volume spike on November 2nd. Professionals were active on those bars and they were buying!
The final confirmation that the stock was ready to move higher came on November 9th when after a few bars of sideways movement a down bar appeared on very low volume. This indicates the absence of professional interest in lower prices. Please note that on this day the trend of the instrument did not change to the up side yet and many traders still expected the down trend to restore.
While we are focusing on high-volume bars here, the example above also shows how low volume, when it appears at specific areas of the chart, can provide a lot of useful information too.
A lot of these pitfalls are covered in more depth our most recent course: `The Wyckoff VSA Trading School`. A self-paced course, it consists of 12 x 90-minute sessions.
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