Price and Volume
- Thread starter dbphoenix
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Only volume, candles, and trendlines.
Don't know what you mean by "traditional" or by "more timely". If you mean "more timely" than indicators, then yes.
As explained earlier, this thread is about the principle of demand and supply and how it's manifested in price and volume. It's not about tactics. Understanding the principle comes first (though one can, of course, trade without having the slightest idea what supply and demand are). Once that principle is understood, there are many, many sets of tactics that can be employed to profit from what one has learned, not only with regard to entry and exit, but also with regard to trade management. I should add, however, that it's important to consult at least one chart with a larger bar interval, at least 60m, if not daily, in order to get some idea of the general trend. It's also important to consult at least one chart with a shorter bar interval in order to see what's going on within each candle, particularly the long ones.
I suggest you attempt to apply what you learn from the pdf on Demand/Supply posted earlier to your own charts and launch a journal to audition various tactics, indicators if you like, bar intervals, and so on. That way, you'll have control over your own direction.
Yes, it does put you on the right side and, yes, it's supposed to keep you there. But I can think of no better entry and exit signal if one thoroughly understands the nature of supply and demand.
For example, today there was one best entry point: the 2b (i.e., the fakeout to a new high after breaking the trendline). Assuming that one took that, there was no reason, as I tried to show by my notes, to exit the trade. As you point out, and as I pointed out in the chart, there were nice volume bars on selloffs. However, even though some of them had the potential to be climactic, none were, for reasons that I supplied for at least some of them. Therefore, at most one would tighten his stop; there never was any reason to exit the trade outright, unless one had a specific target and took it and said the hell with it.
There's a lot more that could be said about the PV patterns and pairs and relationships, but there's only so much you can put on a chart. And there will be more. No need to analyze every bar in every chart. Plus the Demand/Supply pdf requires quite a lot of study, and only a few people have looked at it.
Sorry, no.
In an uptrend, the "demand line", which is drawn as a straight line, can serve as a trendline, i.e., that line at which one might expect, as a result of previous price action, demand to show itself. The demand line, however, is not always a trendline, as explained below.
The "supply line" is drawn above the demand line, across those points at which supply, again as a result of previous price action, can be expected to appear. This line is often parallel to the demand line forming what looks like a channel. But before one thinks "oh, yeah, channel", the "channel" itself is largely irrelevant. What matters is the supply line and what it represents. If and when it no longer represents those points or levels at which supply is being introduced into the market, then it no longer has any use. If possible, a new one must be drawn. If, for example, supply begins entering the market at earlier stages, the supply line can be drawn at an acute angle, suggesting a loss of momentum.
The demand and supply lines differ from trendlines in that they can be horizontal, e.g., marking the boundaries of a trading range. Using these terms rather than "support" and "resistance" helps one to be clear about just what it is he's looking at and for and referring to with regard to these trading ranges.
In a downtrend, the "supply line" can serve as a trendline, just as the demand line can in an uptrend. The demand line, then, is drawn below the supply line and represents those points or levels at which one can expect to see demand appear and is generally parallel to the supply line. Everything else said earlier applies here. Just change up to down.
All of this may seem nit-pickey, but "support", "resistance", "demand line", "supply line", "trend", and "trendline" all have specific meanings, though they may also overlap and even coincide. What this specificity does for the trader is help him to think differently about what he's seeing, particularly within the context of price and volume behavior. For example, one doesn't expect price to bounce at $ because there's a line there, but because demand has repeatedly appeared there. If the quality or nature of that demand changes, the line may be irrelevant. Many traders, however, have a lot of trouble letting go of that line, and that leads to problems.
I'll try to work up a couple of charts tonite that may help illustrate what I've been trying to say.
The 0940 bar represents a potential selling climax, even though S there is relatively minor. The 1000 bar represents an attempt by buyers to push price higher. Their demand, however, is met by an equivalent level of supply, resulting in a doji-ish bar. Price then drops to more important S at the 1460 level, where another potential selling climax stops the decline (the volume is not appreciably higher than the 0940 bar, but the S is more important, attracting more buyers).
You just saved me some time on today's chart posting
Quote from JackDaniel:
Thanks for helping. As I said, I'll do my homework and read the stuff you posted so I'm not so dense, hopefully
In trying to follow your explanations while
looking at your NQ charts from 3 01 and 3 02,
I note, as an ES trader, that I'm not seeing
as much of a clear cut volume/price relationship.
I'm sure part of it is not being used to it yet,
but also I note your NQ volume seems smoother
and makes more sense relative to your chart
markings. Where if I try to relate those same
things to an ES chart of the same dates,
it's not as clear. I also note you guys on the NQ
have many times the volume we have, if your
chart is correct. We get 500 to 600k contracts
per day. It looks like you get that in one 5m bar.
Could that be smoothing the volume out a bit
and make it easier to see the relationships
versus the ES ?
jd
The NQ range is 2.5 times that of the ES, so it moves more. Theoretically, you ought to be able to do as well with one as the other, but I find that it depends entirely on your strategy. I, for example, find it next to impossible to "see" what's going on between buyers and sellers in the ES. OTOH, I see no particular advantage in trading the ES, so not being able to do so is not an issue.
I wouldn't worry about the specifics regarding the NQ charts. My focus is the demand/supply relationship and how that's displayed in price and volume bars. Therefore, one can apply the principle to any trading instrument.
I'm quoting the above to save people the hassle of looking up the post that the following refers to.
Moving along, it's probably best to begin with support and resistance. Support and resistance provide those zones at which or in which one expects to see some action. To trade without regard to support and resistance can mean a lot of little stopouts and a lot of breakevens.
Essentially, support and resistance levels can be found at those levels or zones in which a relatively large number of trades took place. These trades need not have occurred on only one occasion. In a base, for example, when "big money" is accumulating shares, these trades take place over an extended period of time over a narrow range of prices. Therefore, all told, many trades have taken place even though volume has been low.
Many trades can also occur in a broader range over a period of time which may be shorter or longer than an accumulative base. For example, if a given level is hit repeatedly and price is "supported" there by professional demand, that level becomes strong support, even though the number of shares traded during any one occurrence are not impressive.
Ditto all of this for resistance. There will be a level at which shares or contracts or whatever are repeatedly sold, though the reasons for the sales may be difficult if not impossible to determine. These sales can take place in a "zone of distribution" (see the Demand pdf posted at the beginning of the thread). Or they can take place over time when a particular level is repeatedly tested.
Support and resistance, then, can be found in a swing point or the top or bottom of a reaction, but it is highly unlikely that the support or resistance found there will be important as it doesn't represent enough previous trades. In other words, there just aren't enough traders who care about it to make it important.
For the same reason, whatever support and resistance seem to be found with indicators or trendlines are most likely coincidental since these other lines don't represent previous trading activity. In fact, they're constantly moving.
The term "law of reciprocity" or "principle of reciprocity" is sometimes applied to the tendency of support to become resistance when it's penetrated, or vice-versa. However, "law" and "principle" are a bit high-toned to apply to this concept. There is nothing absolute about S/R. In fact, S/R can be quite soft. For example, if a given level is tested repeatedly as support, those holders who bought there may eventually begin to become concerned over these tests and over the fact that whatever they bought isn't going anywhere. Some of them may decide to sell some of all of whatever they bought if and when another test occurs. In this way, support fails.
Even "failure", however, may not be as important as first thought. S/R isn't, and need not be, rigid. In fact, it is quite flexible. A level or line can be penetrated to what seems to be an intolerable degree, but if price rebounds to that level or line and finds S/R there yet again, then that level or line can become even "stronger" (more impotant) than it was before, which is why it's better to think in terms of S/R "zones" than of specific prices.
S/R may, in fact, be too soft for some traders to fool with. However, if one understands that correctly-drawn S/R lines represent levels or zones in which a large number of trades took place, and that one can expect important action to take place at important S/R ("important" defined earlier), he can then avoid wasting his time on relatively trivial trades and prepare himself to take advantage of more potentially profitable opportunities.
Attached is a monthly Naz chart with S/R zones and levels drawn in. I'll elaborate on that in the next post.
I'll try to make this quick and painless.
Note at "1" that price, for whatever reason, who cares, bases for at least six months. That's a lot of trades. Thus, when price finally begins to move, then corrects in July '96, it finds "support" at that base. Why? Because a hell of a lot of people are holding shares at those prices and aren't willing to be rattled out of their shares. At least not yet . . .
One then winds up with a zone between 1 and 2 in which a lot of trades have taken place. In this timeframe, with this bar interval, that becomes potential support that may become important on the way down.
Between 3 and 4, there's another base, this from six to seven months. When price moves out of it, it doesn't come back just to 4, but all the way back to 3 in August '98. This will make the area between 3 and 5 a formidable block on the way back down, particularly since 5 had its own 4+ month base.
6 and 7 represent another zone, though not as long as the others. However, it's long enough to retard the decline in December '00 and January '01. Note also the volume ("A") that accompanies this temporary halt.
As for the rest of it, I probably don't need to go into detail as to why prices have behaved the way they have. There is an assumption, of course, that "holds" do expire, and that trades that were made years ago are perhaps irrelevant. However, as can be seen, these zones continue to affect current trading. One can, for example, formulate a number of hypotheses regarding why we are levelling off at this particular point.
Next is a weekly chart of the Naz, easier to understand within the context of this monthly chart.
Note at "1" that price, for whatever reason, who cares, bases for at least six months. That's a lot of trades. Thus, when price finally begins to move, then corrects in July '96, it finds "support" at that base. Why? Because a hell of a lot of people are holding shares at those prices and aren't willing to be rattled out of their shares. At least not yet . . .
One then winds up with a zone between 1 and 2 in which a lot of trades have taken place. In this timeframe, with this bar interval, that becomes potential support that may become important on the way down.
Between 3 and 4, there's another base, this from six to seven months. When price moves out of it, it doesn't come back just to 4, but all the way back to 3 in August '98. This will make the area between 3 and 5 a formidable block on the way back down, particularly since 5 had its own 4+ month base.
6 and 7 represent another zone, though not as long as the others. However, it's long enough to retard the decline in December '00 and January '01. Note also the volume ("A") that accompanies this temporary halt.
As for the rest of it, I probably don't need to go into detail as to why prices have behaved the way they have. There is an assumption, of course, that "holds" do expire, and that trades that were made years ago are perhaps irrelevant. However, as can be seen, these zones continue to affect current trading. One can, for example, formulate a number of hypotheses regarding why we are levelling off at this particular point.
Next is a weekly chart of the Naz, easier to understand within the context of this monthly chart.
Here now it may be easier to see why, in the context of the monthly chart, the descent began to slow at 1560 and 1192 (noted also on the monthly chart, though the numbers themselves are not as important as the zones in which they are found) in preparation for a bottom. The increase in volume can also be seen on the weekly, whereas it's buried on the monthly.
But, again, as briefly as possible, we reach a bottom, make a higher low (which occurs because of demand), then draw a tentative demand line. The ascent accelerates, rests at previous R at 1500, then takes off again, pausing at fairly predictable levels.
The "supply" line, dotted, is drawn parallel to the demand line. It has a number of uses apart from helping the trader to predict those levels or points at which he can expect to find supply. For one thing, if price fails to reach it, there is an indication that the dynamic is changing (ditto if price penetrates it). In Oct '03, in fact, price does regularly fail to reach this line, and one can rotate it downward to reflect the change in momentum, the first clue of a potential top.
All of which is at least in part to explain why 2000 is such important support and to help understand the current decline. The levels at which buyers are encountering supply have been falling. However, they haven't been trying too hard, either, as evidenced by the slackening of volume. Yes, we could bounce here and, yes, we could make a new high. However, momentum has slowed, the uptrendline has been broken, and there is a hell of a lot to work through. If nothing else, this ought to serve to temper one's enthusiasm and approach the daily charts more objectively.
But, again, as briefly as possible, we reach a bottom, make a higher low (which occurs because of demand), then draw a tentative demand line. The ascent accelerates, rests at previous R at 1500, then takes off again, pausing at fairly predictable levels.
The "supply" line, dotted, is drawn parallel to the demand line. It has a number of uses apart from helping the trader to predict those levels or points at which he can expect to find supply. For one thing, if price fails to reach it, there is an indication that the dynamic is changing (ditto if price penetrates it). In Oct '03, in fact, price does regularly fail to reach this line, and one can rotate it downward to reflect the change in momentum, the first clue of a potential top.
All of which is at least in part to explain why 2000 is such important support and to help understand the current decline. The levels at which buyers are encountering supply have been falling. However, they haven't been trying too hard, either, as evidenced by the slackening of volume. Yes, we could bounce here and, yes, we could make a new high. However, momentum has slowed, the uptrendline has been broken, and there is a hell of a lot to work through. If nothing else, this ought to serve to temper one's enthusiasm and approach the daily charts more objectively.
030304
Quote from dbphoenix:
The 0940 bar represents a potential selling climax, even though S there is relatively minor. The 1000 bar represents an attempt by buyers to push price higher. Their demand, however, is met by an equivalent level of supply, resulting in a doji-ish bar. Price then drops to more important S at the 1460 level, where another potential selling climax stops the decline (the volume is not appreciably higher than the 0940 bar, but the S is more important, attracting more buyers).
You just saved me some time on today's chart posting
It should be easy enough to apply the above comments to the attached chart.
There's very little to add except to point out that there was weak follow-through to the "reversal" at 1000. The rest of the comments are on the chart.
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