Volume Price Analysis by Anna Coulling
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Hi everyone, in this video we review the book; Volume Price Analysis by Anna Coulling.
Anna has gained considerable authority in the trading world as an author, creating many books based on the concept of volume and price action.
As a fulltime trader and regular poster on twitter, Anna claims that Volume and Price Action can be used across all markets, whether that is Crypto Currency, Stocks, or Forex.
Anna says;
“Learning this method was a defining moment in my life and trading career. I hope that this book will be equally life changing for you too”.
Let’s summarise Anna’s thoughts and learn how the concepts can be applied to your own trading approach.
Anna puts considerable emphasis on volume throughout the book, and starts by saying:
“It is the ONLY leading indicator, which when combined with price, truly reveals the future direction of the market. In addition, volume reveals something equally important. Whether the price action is valid or false”.
Anna admits that her road to success was not ground-breaking, it has been used for over 100 years by many of the iconic traders covered on our channel.
One of the most iconic names in trading over the last century was Richard Wyckoff, known for his Wyckoff Method, and Anna gives considerable credit to the principles of her concept through his research.
Wycoff himself leaned on the knowledge of Jesse Livermore.
At the core of all the research and application, Wycoff detailed three basic laws:
The Law of supply and demand. The law of cause and effect, and the law of effort and result. With each of these highly correlated to volume and price action within financial markets.
If we take Supply and Demand, when demand is greater than supply, prices will rise to meet this demand, and conversely, when supply is greater than demand, prices fall. Such price action often forms a supply zone and a demand zone. Such zones often signal as areas of distribution or accumulation.
The law of cause and effect sits behind this supply and demand action, in other words, the volume is the cause, and the price action is the effect. If the cause is small the effect will be small and if the cause is large the effect is large.
The final and most important piece of Wycoff’s theory, is the law of Effort vs Result.
Like Newtons law of physics, every action must have an equal and opposite action. This means that the price action of a chart must reflect the volume action below it.
This is where Anne suggests anomalies and opportunities can be found in a chart. If for example volume (or demand) is large, and the resulting price action is equally large, then price is acting rationally, whereas a small amount of change in volume, yet a large change in price action signals an anomaly.
The importance of correlation between price and volume has been long standing. Referred to as ticker tapes, these tapes were distributed through ticker machines to various brokerage offices, and these became the study of many iconic traders. The only numbers presented on the tapes were price and volume.
With the relationship of volume and price in mind, let’s look from a more practical perspective.
The theme throughout the book is that of validation, whatever price action is seen it must be supported by volume. The validation process is analysed candle by candle and has the same relevance regardless of time frame.
First we need to understand how a candle develops. The candle will open in a neutral position, often at the close of the previous candle. During the course of trading activity the candle will usually fluctuate whilst the bulls and the bears battle against each other. In this example the bulls win with price closing higher than the open, however price action can be seen either side of the closing candle, with this wick showing the high of price during the action, and this wick showing the low of price during the action.
The high of the wick followed by retracement represents buying exhaustion, and the low of the wick followed by retracement represents selling exhaustion.
Equally, these price battles can be interpreted as areas of support or resistance, or as per our previous theory, a demand or supply zone. Either way they provide important clues on where price could move next. This candle would be seen as a candle of indecision and would perhaps be better left alone.
The next candle we see a bullish move in price, closing above the previous high with a small retracement from the open. Cleary the price action suggests that the bulls have control, with demand taking up supply. However, this is where we need the validation of volume before making a conclusion.
As per Wycoff’s law of effort and result, we could perhaps see a relatively equal amount of effort in relation to result, in which case we could assume normal behaviour and validation of the move. If on the other hand the effort is low relative to the result, we can conclude an anomaly and validation is not provided.
Such anomalies should sound the alarm bells and could be a sign of market manipulation.
The opposite could also be seen, with a small increase in price yet a large increase in volume. This situation suggests that the position is looking weak and often marks the top of a bullish trend or the bottom of a bearish trend.
This anomaly occurs when long positions start to be liquidated and new eager traders take up long positions, in such a scenario volume is high but not strong enough to move price significantly higher in proportion to the volume. In other words, the combination of volume and price is revealing a red flag and a potential end of the trend.
I like Anna’s analogy to cement this point when she says:
“This is akin to driving up an icy hill which is gradually increasing in steepness. At the start we can still move higher, but gradually as we try to move up the hill we have to increase the power, eventually getting to a stage where we are on full power and standing still”.
Let’s take this a step further with multiple bar validation.
In a strong uptrend we could see candles gaining in size sequentially, and to validate the move we want to see an equivalent sequential increase in volume. Such a move is a valid sign of accumulation.
Conversely, the same price action without the same sequential increase in volume suggests the move is not valid and some market manipulation may be at play.
The same principle applies to a strong downtrend in price, we want to see the same volume increase aligned to the increasing sized candles, this would again validate the move.
Before moving to some more practical examples, could I please ask you to support the channel by hitting the like button or perhaps even subscribing, thanks.
Using a schematic from the book, we can use price action and the validation of volume to look for market tops, or equally market bottoms if we were to invert this example.
This market top example is described as a distribution phase, and here we have signs of a selling climax prior to a decline.
The long wicks above the candle bodies represent the area of supply, where sellers are taking charge of the action, pushing prices back down after a test of demand. But remember for this to be meaningful action, we need validation of volume, and below we can see increased volume in relative proportion to the price action, therefore providing validation.
Let’s look at the theory of volume validation on some real charts.
Using a recently closed trade from my portfolio, here we see the stock Einhell on the weekly chart.
We can pick out a few candles which could have provided some clues on price direction. The first significant candle can be seen here, which is accompanied by an equally increasing volume candle, this tells us that the price move is valid.
The next bar would be the breakout bar in which we entered a position, again this is accompanied by an equally increasing volume bar validating the move.
The next large weekly price move is seen here in August of 2021, but this time the volume does not proportionally match the increase of the candle, this suggests a false move and could be a sign of market manipulation, coincidentally the price did not pass this point for another 3 months after losing its momentum.
Next we see another large price move, but again the volume candle is not in proportion to the move, in fact the candle before was only 25% of its size yet achieved the same amount of volume, another anomaly which should raise an eyebrow.
Soon after we see some significant wicks above the candle bodies, with the most significant being this red candle with a large wick, additionally this bearish candle with a wide price range is validated by a huge increase in volume. This marked the top of the price and a period of distribution.
We can also look for clues on a different asset class on a lower timeframe, lets look at Bitcoin on the daily chart for example.
Again we look for the big candles, and here we see three in an uptrend, each with volume above 200,000 suggesting that there is no cause to doubt the move. The next significant candle marking a new high however is only accompanied by volume of 150,000, considerably lower than the prior moves up. This should again raise eyebrows and marked the start of prolonged decline.
We recently seen an attempt of recovery with a larger than average price candle, but again the volume is not proportionally higher than other bars in the sequence. The price has since lost its momentum.
A final sample taken from the book, which is aligned to my style, is the breakout.
We see an accumulation phase, and an eventual break of resistance. The break however must be with increasing volume, a break on low volume suggests the move is false, whereas a break on increased volume is a valid move.
To further validate the move, a pullback is commonly seen, but the pullback should be on small volume. Increasing volume in proportion to the subsequent uptrend is a good sign.
In summary, on any asset, on any time frame, whether you are looking for trend continuation, market tops or bottoms, or like me consolidation breakouts, we should always ensure the action is validated by volume.
A really good book which I highly recommend.
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