Candlestick Charting by Michael Thomsett

Author:Michael Thomsett
Language: eng
Format: epub
Publisher: De|G Press
Published: 2018-03-15T04:00:00+00:00

For example, in Figure 6.1, a distinctive volume spike marks a turning point. Price gapped higher at the point of the spike, and a likely retreat was marked by the doji star. The candlestick confirmed the likely turn indicated by the spike.

Figure 6.1: Volume spike This example makes the point that a single-day spike in volume accompanying a breakout above resistance could signal that it is not going to last. The immediate retreat in volume was quickly accompanied by a retreat in price as well. However, volume is not a reliable indicator by itself of changes in the trading range. When a change in volume occurs, it can be interpreted based on whether higher volume remains or immediately falls away. However, the volume trend as a confirming factor is not going to be apparent in every instance.

One study reached conclusions demonstrating that volume spikes hold significance as signaling devices, often affecting price behavior after the appearance of the spike. The meaning of this was summarized in three observations:

(a) the impact of good news on price is rapid and pronounced relative to the impact of bad news which occurs gradually and is softened; therefore (b) one-day volume spikes are more likely to precede abrupt market upturns than they are to precede abrupt market downturns; and (c) information diffusion rates and feed-forward information mechanisms, such as momentum and herding, ensure that the direction of the price change immediately preceding and accompanying the volume spike is continued for some future period.41

These observations are instructive, but are by no means absolute. The observed effect of a volume spike cannot be judged in isolation, but must fit with other signals, notably those in price as reflected in candlestick (continuation or reversal). The significance of the spike is properly interpreted within the context of the preceding trend, subsequent price activity, and appearance of candlesticks on the same day as the spike.

Just as the spike indicates likely trend reversal, volume beyond the spike is also a predictor of price activity. Price breakouts may occur as volume levels increase dramatically. This trend is shown in Figure 6.2. Volume grew over a brief period of time, but no price indicators appeared until the bearish engulfing. This was a clear turning point, with the candlestick as strong confirmation of the changes in volume. Price gapped downward and continued to fall.

Figure 6.2: Increasing volume A volume spike is exceptionally strong when it also marks a breakout above resistance or below support. This may be a reversal or an end to a period of consolidation. The chart in Figure 6.3 marks the end of a modest uptrend with two signals, a volume spike and a bearish doji star. Immediately after, price gapped power and remained in a new trading range.

Figure 6.3: Breakout with volume spike In any analysis of volume, the price pattern witnessed in the candlestick is the most important attribute of a trend, reversal, or breakout pattern. Volume is a useful form of confirmation as well as a method for judging the strength of the pattern.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.