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Volume patterns

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Volume is used for two major purposes:

  1. To confirm price changes: if a trend is not accompanied by an increase in volume it is considered to be weak and lacking commitment .
  2. To anticipate changes in price: increases in volume often precede changes in price. See Accumulation and Distribution for more detail.
Size of OI reflects intensity of markets and positions
  • OI down prices up sell (5)
  • OI up prices down sell (10)
  • OI down and Prices down buy (5)
  • OI up Prices up then buy (10)

    Trading Signals

    Trending Markets

    Short-term

    Trend confirmation:

    • Rising prices and rising volume signal a healthy up-trend.
    • Falling prices and rising volume signal a healthy down-trend.

    Trend weakness:

    • Rising prices and falling volume signal trend weakness.
    • Falling prices and falling volume may signal trend weakness. See Low Volume in Down-trends for further details.

    A large range with low volume indicates a lack of interest from sellers (if price is rising) or buyers (if price is falling).

    Long-term

    Trend confirmation:

    • Higher peaks with higher volume at peaks signal a healthy up-trend.
    • Lower troughs with higher volume at troughs signal a healthy down-trend.

    Trend weakness:

    • Higher peaks with lower volume at peaks signal that the up-trend is weakening.
    • Lower troughs with lower volume at troughs signal that the down-trend is weakening.

    Accumulation and Distribution

    Accumulation and distribution indicate who is in control of the market and often signal a reversal.

    Trading ranges represent longer term accumulation or distribution. 

    Accumulation

    Accumulation is when the market is controlled by buyers.

    A down-trend that stalls while volume remains high signals that accumulation is taking place. Sellers have lost control to buyers and a reversal is likely.

    An Accumulation Day occurs when either:

    • Volume increases (compared to yesterday) and closing price moves higher, or
    • After trending downwards, there is little or no price movement and an increase in volume.

    Distribution

    Distribution is when the market iscontrolled by sellers.

    An up-trend that stalls while volume remains high is a sign that distribution is taking place. Buyers have lost control to sellers and a reversal is likely.

    A Distribution Day occurs when either:

    • Volume increases (compared to yesterday) and closing price moves lower, or
    • After trending upwards, there is little or no price movement and an increase in volume.

    Breakouts

    When price is trading in a range, volume may indicate in which direction a breakout is most likely to occur:

    • Higher volume at peaks means that an upward breakout is more likely
    • Higher volume at troughs indicates that a downward breakout is more likely

    Use volume to confirm the breakout:

    • High volume indicates a healthy breakout.
    • Low volume indicates weakness.

    Trend Climaxes

    After a trend has lasted several months, there is often a surge in price and volume, which may signal that the trend is about to expire. Look out for:

    • Spikes
    • Wide-ranging days,
    • Exhaustion gaps, and/or
    • Reversal signals.

    Low Volume in Down-trends

    Low volumes do not necessarily signal the end of a down-trend. Commitment from buyers is necessary to drive up prices. Prices can fall due to a lack of interest from both buyers and sellers. 

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