# Section 2 - Chapter 11,12 - Volume Analysis

Dean at Corporate PGDM um Professional Training Academy
23. Mar 2023
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### Section 2 - Chapter 11,12 - Volume Analysis

• 1. Lecture - 21 Volume Confirmations CMT LEVEL - I
• 2. CMT LEVEL - I Learning Objectives  Volume Confirmation  How Is Volume Portrayed? - Bar/Candle - Equivolume - Point and Figure  How change in volume be interpreted?  How Are Volume Statistics Used?  Volume indicators and Index
• 3. What is Volume? • Volume is the number of shares or contracts traded in a security or an entire market during a given period of time. • For every buyer, there is a seller, and each transaction contributes to the count of total volume. • Volume is an important indicator in technical analysis as it is used to measure the relative worth of a market move. • If the markets make a strong price movement, then the strength of that movement depends on the volume for that period. • The higher the volume during the price move, the more significant the move.
• 4. How volume is Plotted? Bar /Candle Equi Volume Point & Figure
• 5. Bar & Candle •Most common Portrayal of Volume is a vertical bars representing the total amount of volume for that period at the bottom of the price chart. • This method is simple and assumes no direct relationship between price & volume.
• 6. Equi Volume • Equivolume, a charting method introduced by Richard Arms, takes the unique approach of substituting volume for time along the bottom scale of a chart. • When volume increases, the price bar is elongated to the right; therefore, an upwards move on high volume will appear as a higher box that is also wider. • EquiVolume charts look similar to candlestick charts, but the candlesticks are replaced with Equivolume boxes that can be square or rectangle. • Its easier to verify volume for reversals, big moves, support/resistance breaks, and climaxes.
• 7. Equivolume Calculations • An EquiVolume box consists of three components: price high, price low and volume. •The price high forms the upper boundary, the price low forms the lower boundary and volume dictates the width. •EquiVolume boxes are black when the close is above the prior close and red when the close is below the prior close. •volume is normalized to show it as a percentage of the look-back period.
• 8. Equivolume Calculations
• 9. Equivolume Calculations
• 10. Point & Figure •Point & Figure Charts by their nature do not include volume . •The Standard method is to sum the volume that took place while each box was in effect and portray it on the charts. • The Analyst using this method must determine whether this information is helpful.
• 11. Standard Interpretation of Volume Volume Price Interpretation Rising Rising Volume Confirms Price Rise Rising Falling Volume Confirms Price Drop Falling Rising Volume Indicate Weak Rally Falling Falling Volume Indicate Weak Pullback
• 12. Standard Interpretation of Volume • Volume confirms direction. When volume declines, it indicates that a change of direction should follow because there is no general support for the price move. • Price changes that occur on very light volume are less dependable for indicating future direction than those changes associated with relatively heavy volume. • In futures and stock markets, volume has the same interpretation: When volume increases, it is said to confirm the direction of prices.
• 13. Volume Is a Predictor of Volatility • Most often high volume and high volatility occur at the same time. It is easy to see on a chart that one confirms the other. • Not all days that have high volume also have high volatility. Even on days with high volume, the price can close nearly unchanged from the previous day. • Days as a sign of potential volatility—a large number of traders all with their own objectives somehow managed to offset each other. • If there is an imbalance in the buyers and sellers, and volume is still high, prices could break out in either direction. • Therefore, high volume means high risk, even on those days when the risk does not materialize.
• 14. Volume Is a Predictor of Volatility • Most often high volume and high volatility occur at the same time. It is easy to see on a chart that one confirms the other. • Not all days that have high volume also have high volatility. Even on days with high volume, the price can close nearly unchanged from the previous day. • Days as a sign of potential volatility—a large number of traders all with their own objectives somehow managed to offset each other. • If there is an imbalance in the buyers and sellers, and volume is still high, prices could break out in either direction. • Therefore, high volume means high risk, even on those days when the risk does not materialize.
• 15. Average Volume Basic of all volume indicators is the average, and the calculation most commonly used for the equity markets is 50 days, although it may be reasonable to use the same period as the price average that is being used.  Normalizing the Volume  Letting the calculation period, N, be either 50 or 200 days, we can normalize the volume and represent the result as a percent  The normalized volume lets us say that “today's volume is 20% higher than the volume over the past 200 days.”
• 16. Average Volume Volume Momentum and Percentage Change  For momentum, this means finding the change in volume over a specific time interval; percentage change measures the size of the volume change relative to the starting value. If t is today and n is the number of days back  High variance in volume from day to day, volume momentum tends to increase the erratic pattern. It will be necessary to smooth the volume momentum in order to have a useful indicator.
• 17. Volume Spikes •A volume spike is a single day on which the volume was much higher than the previous day—at least twice as high, perhaps three or four times • A volume spike is a warning that something happened, most likely the result of a surprising news release or new economic data. •A volume spike is a clear, positive action by investors.
• 18. Volume Spikes •It implies that a very large number of investors, perhaps even the general public, all hold the same opinion on the direction of the market and feel compelled to act on that opinion at the same time • A volume spike means that everyone has jumped into the boat at the same time. •Traditional interpretation of a volume spike is that it indicates the end of a price move, that is, the boat sinks.
• 19. Volume Spikes on Breakout • Breakouts are usually obvious . •High Volume on a gap or on a breakout from a preexisting chart pattern is usually the sign of a valid breakout. •Many analysts use a spike in volume as a confirmation of the breakout and ignore those without volume spike.
• 20. Volume Spikes & Climax • A climax is a market condition that is characterized by escalated trading volume and sharp price movements at the end of a bull or bear market cycle for an index or security. • Climax Occur with one of the short term reversal patterns. • These are price spikes , pole , two bar reversals , exhaustion gaps , key reversals and any other patterns.
• 21. Shock Spiral • We look at the dead cat bounce (DCB) , we saw that a substantial volume spike occurs prior to the formation. • DCB occurs after a shocking news announcement causes a sudden and dramatic shift in price direction usually accompanied by a large gap or price spike . • An extreme spike in volume accompanies that sudden shifts.
• 22. Volume Price Confirmation Indicator •VPCI plots the relationship between price trend and the volume , as either being in a state of confirmation or contradiction. • A positive deviation in the volume price confirmation indicator (VPCI) suggested that the volume was confirming the price action • A Negative deviation suggested that the volume was contradicting price action
• 23. Volume Dips • Sharp decline in volume are usually not meaningful . • The decline in volume generally indicates a decline in interest in the security which usually decline in Volatility. • Traders watching that stock for the sake of increase in Volatility & volume • A Volume dip is also typical for action just before a sudden expansion in price and volume , as in breakout from a formation.