A Complete Guide To Volume Price Analysis

1. Volume reveals market manipulation and insider activity

Volume is far from perfect. The market makers have even learnt over the decades how to avoid reporting large movements in stock, which are often reported in after hours trading. However, it is the best tool we have with which to see 'inside the market'

Volume exposes hidden market dynamics. It provides a window into the activities of market makers, institutional investors, and other large players who can significantly influence price movements. By analyzing volume in conjunction with price, traders can discern genuine market moves from manipulated ones.

Insider activity becomes visible through volume patterns. Unusually high volume on narrow spread candles or low volume on wide spread candles can indicate insider accumulation or distribution. These patterns often precede major price movements and can provide early warning signals for trend reversals.

• Key volume patterns to watch:
  • High volume on narrow spread candles
  • Low volume on wide spread candles
  • Extreme volume spikes
  • Consistent volume divergence from price

2. Price action alone is insufficient; volume validates or contradicts it

Volume validates price. Start with the candle, then look for validation or anomalies of the price action by the volume bar.

Price and volume are symbiotic. While price charts show the market's decisions, volume reveals the conviction behind those decisions. A price move accompanied by high volume suggests strong market participation and likely continuation. Conversely, a price move on low volume may indicate a lack of conviction and potential reversal.

Volume anomalies provide crucial insights. When volume doesn't align with price action, it often signals impending changes in market direction. For example, a bullish price move with declining volume may indicate weakening buyer interest and a potential reversal.

• Key price-volume relationships:
  • Rising prices with rising volume: Strong uptrend
  • Falling prices with rising volume: Strong downtrend
  • Rising prices with falling volume: Weak uptrend, potential reversal
  • Falling prices with falling volume: Weak downtrend, potential reversal

3. Support and resistance levels are breeding grounds for trends

Support and resistance is where trends are created, born and then propelled on their way. This is where trends reverse and change direction.

Price congestion areas hold vital information. These zones, where prices oscillate within a range, represent areas of equilibrium between buyers and sellers. As these levels are tested repeatedly, they become significant reference points for future price action.

Breakouts from congestion signal new trends. When price finally breaks out of a congestion zone with strong volume, it often marks the beginning of a new trend. The longer and more pronounced the congestion period, the more significant the subsequent trend is likely to be.

• Characteristics of significant support/resistance levels:
  • Multiple touches by price
  • High volume during formation
  • Clear price rejection from level
  • Confluence with other technical indicators

4. Accumulation and distribution phases precede major price movements

The specialists have driven prices higher, but the market is now struggling at this level. They are selling to the market to clear their warehouse, but the buyers are not there in sufficient numbers to move the price higher, as it is constantly knocked back by longer term traders, selling out and taking their profits off the table.

Accumulation marks the beginning of bullish trends. During this phase, large players quietly buy assets at low prices, often using negative news to create selling pressure. The price action appears sideways, but volume analysis reveals increased buying interest.

Distribution signals the end of bullish trends. Here, large players gradually sell their accumulated positions to eager retail buyers who fear missing out. The price may still rise, but volume analysis shows increased selling pressure.

• Signs of accumulation:
  • Increased volume on down days with price holding steady
  • Low volume on up days
  • "Tests" of lower prices rejected with high volume
• Signs of distribution:
  • Increased volume on up days with price struggling to advance
  • Low volume on down days
  • "Tests" of higher prices rejected with high volume

5. The market moves in cycles of filling and emptying 'warehouses'

Accumulation then, is the term used to define an 'accumulation phase' which is the period that the insiders go through to fill up their warehouse, prior to launching a major marketing campaign on selling their stock.

Market cycles mirror inventory management. Just as retailers stock up on inventory before a sale and then clear it out, market insiders accumulate assets at low prices and distribute them at higher prices. This cycle repeats continuously across all time frames.

Understanding the cycle provides trading edge. By identifying which phase the market is in – accumulation, markup, distribution, or markdown – traders can position themselves to profit alongside the 'smart money'.

• Phases of the market cycle:
  1. Accumulation: Insiders buy, prices consolidate
  2. Markup: Prices rise as demand increases
  3. Distribution: Insiders sell, prices consolidate at highs
  4. Markdown: Prices fall as supply exceeds demand

6. Breakouts require confirmation through volume analysis

For any break and hold out of congestion to be valid we need to see 'clear water' above the ceiling of price action.

Genuine breakouts are accompanied by increased volume. As price breaks through a significant support or resistance level, volume should surge, indicating strong participation and conviction in the move. Low volume breakouts are often false and can lead to failed trades.

Volume confirms the strength of the breakout. The higher the volume on the breakout, the more likely it is to continue in that direction. Subsequent price action should also be supported by above-average volume to confirm the new trend.

• Characteristics of a valid breakout:
  • Clear break of support/resistance level
  • Significantly increased volume on breakout candle
  • Follow-through with above-average volume
  • Retest of broken level on lower volume

7. Multiple time frame analysis enhances Volume Price Analysis (VPA)

Using multiple time frames also gives us a view on the longer term trend, and may also help to answer the question of whether the appearance of this shooting start candle is merely a minor reversal or the start of a longer term change in trend.

Combine time frames for comprehensive analysis. Using multiple time frames provides a broader context for price and volume patterns. What appears as a strong trend on a lower time frame may be just a minor correction in a larger trend on a higher time frame.

Align trades with dominant trends. By identifying the trend on higher time frames and trading in that direction on lower time frames, traders can increase their probability of success. This approach helps filter out noise and focus on high-probability setups.

• Suggested time frame combinations:
  • Scalping: 1-minute, 5-minute, 15-minute charts
  • Day trading: 5-minute, 15-minute, 1-hour charts
  • Swing trading: Daily, Weekly, Monthly charts

8. Stopping volume and buying/selling climaxes signal trend reversals

A buying climax is when the insiders are buying during the accumulation phase. To me, this just makes more sense.

Stopping volume indicates potential trend reversal. When a strong trend suddenly encounters high volume with little price progress, it often signals that large players are absorbing the excess supply or demand. This can precede a trend reversal.

Climaxes mark extreme market sentiment. Buying climaxes occur at market bottoms when panic selling is absorbed by strong hands. Selling climaxes happen at market tops when euphoric buying is met with heavy distribution. Both often precede significant trend changes.

• Characteristics of stopping volume:
  • Sharp increase in volume
  • Price spread narrows despite high volume
  • Often followed by reversal candles (e.g., hammer, shooting star)
• Signs of climax:
  • Extreme volume spike
  • Wide price ranges
  • Emotional market sentiment (panic or euphoria)
  • Often followed by sharp reversal

9. Volume at Price (VAP) provides a visual map of support and resistance

Volume at price gives us a very different perspective, as it provides an insight into the concentrations of buying and selling areas, which to me means support and resistance.

VAP reveals price levels with high trading activity. By displaying the volume traded at each price level, VAP highlights areas where significant transactions have occurred. These levels often become important support and resistance zones in the future.

Use VAP to identify potential breakout levels. Areas with high volume concentration on VAP often act as strong support or resistance. When price approaches these levels, traders can anticipate potential reversals or look for breakouts with confirming volume.

• Applications of VAP:
  • Identify key support and resistance levels
  • Gauge strength of potential breakout levels
  • Spot areas of price acceptance and rejection
  • Confirm traditional support/resistance levels

Last updated: January 23, 2025