Practical Technical Analysis (2006) Chapters 8-10

Chapter 8 – Psychology of Price and Volume

Price and Volume

  • Recap
    • Prices rise: buyers are willing to buy higher, sellers are only willing to sell higher.
    • Prices fall: sellers are willing to sell lower, buyers are only willing to buy lower.
    • Each price tick reflects two transactions: a buy and a sell.
  • Volume
    • Activity of traders and investors.
    • Each unit of volume reflects action of persons: one buys from another person who sells.
    • Reflects the degree of emotional enthusiasm among buyers and sellers.
  • Volume plotted as a histogram under price.
  • Do not ignore volume
    • If price is the most important indication, volume is as important.
    • Price movement must be confirmed by volume.
  • Rising volume during a rally
    • More buyers and short sellers are pouring in.
    • Buyers are eager to buy even if they have to buy higher and pay up.
    • Shorts eager to sell to them.
    • Rising volume shows continuous replacement of new bears but scrips are continuously eaten by bulls.
  • As price moves higher, volume shrink
    • Bears are no longer shorting as they can’t take the pain of losing.
    • Falling volume shows that ‘energy’ is being removed from uptrend.
    • Trend might no reverse immediately but hints given.

As price rally moves higher, volume shrinks

  • When volume dries up during a decline
    • Bears are less eager to sell short.
    • Bulls are no longer running for the exits as they would have already sold higher. Weak bulls are shaken out too.
    • Falling volume shows that remaining bulls have a higher level of tolerance.
    • May indicate downtrend/fall is likely to reverse.
  • Burst of extremely high volume
    • Critical points, important news.
    • Bailing out of losers/winners.
    • Suggest current trend is nearing an end.

Price and volume in a downtrend; selling climax


Story – “High Volume Exposed: Four Killer Scenarios Stock Traders Should Care About” by Soh Tiong Hum

Invest Magazine Issue 10 August/September 2009. Click here for PDF version.


Chapter 9 – Trading Rules with Volume

Price and Volume – Trading Rules

  • ‘High volume’ and ‘low volume’ are relative
    • Volume typically goes with the trend e.g. rising, falling volume trend.
    • Volume is always interpreted in relation to the recent past.
  • Rising volume, rising prices are normal
    • Market is in gear, no forecasting value.
    • Reasonable to expect at least one more rally that reaches a new price high when volume does not.
  • Volume leads price during a bull move
    • A new high with low/no volume is a red flag – highly suspected.
    • A market that rallies on trend of lower volume indicates that prices are rising because of a lack of sellers than enthusiasm of buyers.
    • Sooner or later, market will reach a point where sellers are motivated.
  • Decline can persist on low volume
    • Bears continue to sell at a lower price, bulls not eager to buy.
  • Rising volume, falling prices
    • Sellers are more motivated.
    • The decline, other things being equal, likely to be more severe.
  • Downside breakout from a price pattern, trend line or moving average with heavy volume is a bearish sign
    • Usually confirm reversal in trend.
Breakout from trend line, price falls on rising volume

Breakout from trend line, price falls on rising volume


Chapter 10 – Special Volume and Price Formation

Selling Climax

  • Price trending down.
  • Accelerate price in fall with expanding volume.
  • Low created is unlikely to be that easily violated for a considerable time.
  • Price rise from a selling climax can be accompanied by declining volume.
  • Termination of bear market is often (not always) accompanied by selling climax.
Selling Climax

Selling Climax


Low volume on test

  • Prices advance following a long decline.
  • Then fall again to a level slightly above, or marginally below, or same level as previous bottom.
  • Bullish signal if volume on second bottom is significantly lower than volume on first.
  • When previous low is being tested with low volume, implies complete lack of selling pressure.
Low volume on test

Low volume on test


Technical lessons from biggest Singapore stock market fall in 2013


Technical lessons from biggest Singapore stock market fall in 2013

Asiasons Blumont Liongold stock charts

Weekly charts of Asiasons, Blumont and Liongold on 07 April 2014

Practical Technical Analysis (2006) Chapter 7

Practical Technical Analysis (2006) Chapters 11-14

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