The Price / Volume Relationship

[Spydertrader 10]

Volume leads Price. Always. And without exception.

 

In order to comprehend how the above statement (both in concept and in practice) represents a true and accurate assessment of market dynamics, a trader needs to understand the basic structure of all markets and how such markets operate. Since all markets represent a fractal nature, it turns out, Mandelbrot had it right all along. By correctly and thoroughly applying a framework, in an effort to ‘see’ the various fractals operating on a market, a trader can begin to see the Price / Volume Relationship at work – all day, every day.

 

Succinctly, unless and until the components of one fractal reach completion, the next slower fractal cannot begin. It trading terms, unless and until the Volume Cycle Sequences reach completion, the current Price Trend cannot end.

 

In general terms: if Volume is increasing, then the Price Trend is continuing.

 

Such is the essence of the Price / Volume Relationship.

 

Much debate has ensued over the years with respect to whether or not Volume represents helpful and / or useful information with respect to understanding Price change. In addition, those individuals who do find value in Volume analysis have long argued their viewpoint for the best methodology for divining the information from Volume itself. For those interested in continuing such discussions, I recommend reviewing the plethora of threads already in existence as I have no plans to engage in yet another long drawn out Lincoln-Douglas, Presidential or Academic style debate.

 

Rather than create yet another environment for posting opinions or sowing the seeds for epic battles over dogmatic philosophies, my goal here is to provide a framework, for anyone with an interest, to learn how to learn to ‘see’ the Price / Volume Relationship at work as shown through the fractal nature of all markets. In other words, this thread isn’t about me teaching people to trade, ‘calling’ trades or seeking converts to a new religious cult. This thread is about the individual trader developing the skills needed, and the knowledge required, to learn to trade based on what the market says, instead of what the trader believes (or I post).

 

So, what can one expect from this thread?

 

Over the next few posts, I plan to detail the fundamental building blocks used in order for a trader to thoroughly, correctly and consistently annotate a chart across three separate trading fractals. By learning to see the visual cues provided by Price and Volume (Trend Lines and Gaussians), a trader can develop the ability to see the Price / Volume Relationship at work. I expect a number of questions with respect to the need for me providing clarification on a number of posts moving forward. Everyone should feel free to post as frequently as necessary in order to completely comprehend the various aspects of The Price Volume Relationship as presented. I encourage active participation from those attempting to learn.

 

In addition, everyone can expect to see plenty of information which flies in the face of conventional wisdom and long held belief systems. Contradicting conventional orthodoxy and religious dogma, when it comes to individual trader beliefs, often creates an almost visceral response from those who feel (for some unknown reason) threatened by the mere discussion of alternative viewpoints than exposed in the mainstream literature. Again, I have no desire to debate the validity of that which I use to trade on a daily basis. Anyone who feels they ‘know best’ or simply considers the information already presented devoid of value, should stop reading immediately.

 

To reiterate, this thread will not teach you to trade. If you are looking for a canned set of rules for entry and exit, look elsewhere. However, this thread will teach you to learn how to teach yourself to trade using the only tools you’ll ever need – a chart and your own brain.

 

Lastly, the market speaks on every single bar delivering its signals to the trader in a timely fashion – and well in advance of the next trend. It turns out; one need not know how long a particular trend will last. One only need know the signals for when a particular trend has come to an end. As all trends overlap, where one trend ends, the next trend begins.

 

The basic principles involved in learning The Price / Volume Relationship require no more than a few paragraphs to articulate. The repeated and consistent application of those principles onto the market represents the bulk of the effort required of the individual.

 

To Be Continued ....

 

- Spydertrader

[Spydertrader 10]

(M-A-D-A)

 

Monitor, Analyze, Decide, Act. This four part paradigm represents the process by which individuals choose to enter into a trade. We will spend the vast majority of the time focusing on, and learning to, properly Monitor the market in an effort to thoroughly, completely and correctly annotate a chart. Although The Price / Volume Relationship operates across every trading instrument, for the purposes of this discussion, we will use the S & P 500 E-mini futures contract (commonly referred to as ‘The ES’). Please use a Five minute ‘Bar (OHLC) Chart’ (set for RTH [9:30 AM to 16:15 Eastern]) - only showing Price and Volume – you’ll require nothing else.

 

To Be Continued ...

 

- Spydertrader

[Spydertrader 10]

Vocabulary

 

Some Vocabulary which might come up from time to time …

 

LTR – Left to Right

RTL – Right to Left

LTL – Left Trend Line

RTL – Right Trend Line

BO – Break Out of a Trend

FTP – Flat Top Pennant

FBP – Flat Bottom Pennant

Sym – Symmetrical Pennant

Fractal – a geometric pattern that is repeated at every scale

VE – Volatility Expansion – ‘pushing out’ of the Left Trend Line

 

 

To Be Continued ...

 

- Spydertrader

[Spydertrader 10]

Trend Lines

 

Accurately drawn trend lines in a chart Price Pane represent ‘containers’ of trend on the three trading fractals. We represent the fastest trading fractal using skinny lines (described as ‘tapes’) which, in turn, build the next slower fractal (represented by ‘medium’ weight lines) – known as a Traverse. These Medium fast trends (Traverses) build the slowest fractal (thick line weight) known as a ‘channel.’

 

 

To Be Continued ...

 

- Spydertrader

[Spydertrader 10]

Tapes

 

Attached, please find ten scenarios which cover the number of two bar (or more) formations (the smallest tape) possible as formed by the market. The market creates each trend (skinny, medium and thick [or fast, medium and slow, if you prefer]) by forming a Point One, Point Two, Point Three trend between the Right and Left Trend Lines.

 

 

To Be Continued ...

 

- Spydertrader

[Spydertrader 10]

Gaussians

 

The Volume Sequences (represented by Dominant and Non-Dominant Gaussian Formation) when matched with the above drawn trend lines for each trading fractal create the B2B 2R 2B (uptrend) cycle, as well as, the R2R 2B 2R (downtrend) cycle. Increasing Volume in the direction of the current trend represents dominant Volume. We represent such phenomenon with an increasing Gaussian line in our Volume Pane with the goal of syncing our trend lines with our Gaussian lines of equal weight See Attached.

 

 

To Be Continued ...

 

- Spydertrader

[Spydertrader 10]

Steer and Focus

 

While additional tool sets allowing for finer and finer granularity can be used in an effort to perform the M-A-D-A Process Intra-Bar, for the purposes of this discussion, one only need annotate at the end (or close) of a ES 5 minute Bar. Feel free to practice on static (EOD) if need be, but ultimately, the goal needs to be real time annotations which alert the trader to what must come next in terms of Volume Sequences. Remember, much more information exists in a Price Chart than what most people readily notice. Through the process of differentiation a trader can learn to see that which they have missed (and what many claim doesn’t even exist).

 

To Be Continued ...

 

- Spydertrader

[Spydertrader 10]

The Journey Begins

 

What sequences the market requires completing today often continues over from the previous day. As such, placing ‘carryover’ tapes, traverses and channels from the previous trading day alerts the trader as to which sequences the market still needs to produce / complete. Since these Volume Sequences continuously move from one day to the next (as well as throughout an entire trading day), for all intents and purposes, ‘gaps’ do not exist. Sure, anyone can plainly see Price gap one direction or another, but in terms of Volume Sequences markets represent a continuous stream of information. In order to create the proper visual ‘scene’ for viewing the Volume Sequences, simply mentally (or use software which automatically adjusts the market for you) slide the Opening (current day) Price up to the previous trading day closing Price (16:15 Eastern Time). While some might consider my comments on gaps utter heresy, logically, one can show many examples of trends which continue from one day to the next (Wednesday to Thursday last representing one such example). In addition, one can, quite frequently see the market begin the first part of the day heading off in one direction, only to reverse course and spend the rest of the day heading in another (See Wednesday morning until 10:35 Eastern Time for a recent example). Again, unless and until the Volume Sequences complete, the current trend cannot end, nor can the next trend begin. Therefore, if trends have the ability cross a multi-day boundary, logically, the sequences of the Price / Volume relationship must also have the ability to continue across the EOD. This ability of the Price / Volume Relationship to extend beyond close of business renders gaps unimportant and irrelevant. As such, they do not exist. To reiterate, with respect to ‘gaps’ in Price, I realize a number of trading methodologies exist, and a significant number of authors have written books describing, the exact opposite of what I have written here. We are not discussing those methodologies here. I am not saying one cannot develop probability based methodologies which can produce profit (hell, I used to trade an ‘opening gap’ strategy years ago). What I am saying is, for the purposes of ‘seeing’ the Price / Volume Relationship at work, gaps (and any probabilistic methodologies associated with them) serve no purpose and play no role in how one views the ‘right’ side of the market.

 

Finally, when a trader begins the process of learning to differentiate that which they believe exists from that which actually does exist operating under the ‘correct’ mental state augments the learning process. In other words, ‘learning to learn’ begins with observing the market (almost in a scientific sense) in order to see that which exists, rather than, in an effort to prove or disprove pre-conceived notions. I do not expect anyone to blindly follow along, nor to I demand any great ‘leap of faith’ in order to participate. I’ve simply shown you how and where to go and look. Whether or not one chooses to actually go and see for themselves, remains a matter of individual choice.

 

Should any of the above posted information seem unclear, or if anyone requires additional clarification, please do not hesitate to let me know.

 

More to come as we move forward, and Good Trading to you all.

 

- Spydertrader

[atto 20]

Thanks for sharing this. I know several people wanted a more in-depth description of what you do. Perhaps you might be able to show some real-time analysis of these concepts this coming week? As you know full well, annotating a chart in hindsight is very different from being able to do the same thing real time (which is very different from being able to act on observations).

[euclid 10]

Gaussians

 

The Volume Sequences (represented by Dominant and Non-Dominant Gaussian Formation) when matched with the above drawn trend lines for each trading fractal create the B2B 2R 2B (uptrend) cycle, as well as, the R2R 2B 2R (downtrend) cycle. Increasing Volume in the direction of the current trend represents dominant Volume. We represent such phenomenon with an increasing Gaussian line in our Volume Pane with the goal of syncing our trend lines with our Gaussian lines of equal weight See Attached.

 

 

To Be Continued ...

 

- Spydertrader

 

So price and volume move in sync, as you have illustrated, with price and volume peaking at the the same moment. No argument with that. How do get from this to "volume leads price".

[thalestrader 14]

Perhaps you might be able to show some real-time analysis of these concepts this coming week? As you know full well, annotating a chart in hindsight is very different from being able to do the same thing real time (which is very different from being able to act on observations).

 

There are five threads over at ET with a combined 5135 pages (and counting) devoted to this method.

 

Having not subjected myself to reading the full 5135 pages, I cannot say for certain that there is not one real time example where both technical analysis and a specific trading action were simultaneously posted, but if such a real time example exists, I have not found it. If one does exist, it still does not excuse the OP and his cohorts from having ignored repeated request by myself and others that they show how their method is applied in real time.

 

I doubt that Jack Hershey (aka Mr. Black) or Spydertrader or any of their followers will ever post real time analysis with a concurrent tradable action. I hope I am wrong, because if they were to do so, then folks could begin to discuss and debate the merits or demerits of the method intelligently.

 

Here is an excellent mini-essay on Jack Hershey and his method:

 

http://www.tradersnarrative.com/jack-hersheys-incomprehensible-method-971.html

 

The author of that essay cites a caution from Curtis Faith's Way of the Turtle that would be very instructive for any newcomer to the trading world (or those not so new but nonetheless still struggling) to type, print out, and tape to his or her computer monitor:

 

"One sure sign of a Pseudo-expert is writing that is unclear and difficult to follow. Unclear writing comes from unclear thinking. A true expert will be able to explain complicated ideas in ways that are clear and easy to understand."

 

All the information that is posted here by the OP can be found at the beginning of the ET threads. If there is to be no real progress to communicate the application in real time of this method here at TL, then perhaps he will at least explain his motives for bringing it here.

 

I know this post will likely be reported. I know that it may be deleted. I would hope that James refrains from doing so.

 

TL participants need to press on with the request that the OP demonstrate the method he represents in real time. If he does so, then we will have a wonderful opportunity to discuss, debate, and possibly learn something that might be put to real use (I will always maintain an open mind in the face of real-life, practical examples; but I also maintain a healthy skepticism in the face of nothing other than pedantic pronouncements of self-professed absolutes). If he does not provide such examples, then we will have protected all but the most desperate from being fooled into wasting precious time and money learning a method of dubious practical value.

 

Best Wishes,

 

Thales

 

Moderated Message:

Thales is expressing an opinion and I do not see the need to moderate this post despite being reported several times. Until further disputes escalate, this post will remain as it is. Thank you. - Soultrader -

Edited July 5, 2009 by thalestrader
spelling

[DbPhoenix 42]

First, whatever does or does not go on at ET is irrelevant to what goes on at TL.

 

Second, neither Spydertrader nor Jack Hershey are required to prove anything to anybody unless they are selling something.

 

Third, there is no such thing as a "real-time" trade posted to a message board. Even if there were, neither Spytrader nor Jack Hershey are required to post one. Nor are either of them required to provide real-time trades in chat, particularly since such trades can also be massaged and do not offer proof of anything.

 

Fourth, TL members do not need to "press on" with anything. The chief difference between ET and TL is that TL members will examine a particular assertion or approach or "method", and, if it appears that there is no substance to it, they will ignore it, and it will drop to the bottom of the barrel. ET members, on the other hand, will launch into multi-hundred-post threads which consist mostly of personal attacks, insupportable rebuttals, and so forth.

 

If you leave this alone, it will wither since TL members are more interested in the work than in pointless arguments about trivial pursuits. If you don't leave it alone, you will prompt and perpetuate just that outcome which you claim you want to avoid.

 

Even if it were possible to prevent the gullible from being led down the garden path, one would first have to determine what is or is not a garden path, then determine who is or is not qualified to prevent the gullible from walking it. There are a number of ongoing threads which to me are pure nonsense, and those who follow what's being said in those threads are very likely to come to grief. But even if I could prove beyond any reasonable doubt that they are wasting their time, it's really none of my business. People have to do what people have to do, and no one has a lock on the path to profitability.

 

Locusts swarm and then move on.

[thalestrader 14]

If you leave this alone, it will wither since TL members are more interested in the work than in pointless arguments about trivial pursuits. If you don't leave it alone, you will prompt and perpetuate just that outcome which you claim you want to avoid.

 

Though I disagree with your comments concerning the posting of real-time trades, this point is well taken.

 

I will henceforth leave this alone.

 

Thank you,

 

Thales

[Spydertrader 10]

Thanks for sharing this.

 

You are most welcome.

 

I know several people wanted a more in-depth description of what you do.

 

As I indicated in the "Open and Free discussion on Volume" thread, as long as an interest exists, I'm happy to provide a more detailed description of how I trade each day.

 

Perhaps you might be able to show some real-time analysis of these concepts this coming week?.

 

I have always been a strong proponent of learning to crawl before choosing to walk, run or fly. All things in due time.

 

 

As you know full well, annotating a chart in hindsight is very different from being able to do the same thing real time (which is very different from being able to act on observations).

 

I have yet to talk about taking actions, or even seeing the sequences unfold in real time. I've simply offered a way, by which, people can learn to see that which the market provides each and every day.

 

I don't plan on continuing on with this same thread, post after post, a year (or even a month) from now. However, if, during that time, my words, actions or posts bother people, and whip them into a lather, then I encourage those individuals to stop reading my posts.

 

- Spydertrader

[Spydertrader 10]

So price and volume move in sync, as you have illustrated, with price and volume peaking at the the same moment. No argument with that. How do get from this to "volume leads price".

 

Unless and until the Volume Sequences complete on each and every fractal then (and only then) can the Price trend change.

 

1. Sequences Complete.

2. The market provides a signal for change.

3. The trend changes direction.

4. The process repeats - this time in a different direction.

 

Volume leads Price. Always.

 

- Spydertrader

[euclid 10]

Unless and until the Volume Sequences complete on each and every fractal then (and only then) can the Price trend change.

 

1. Sequences Complete.

2. The market provides a signal for change.

3. The trend changes direction.

4. The process repeats - this time in a different direction.

 

Volume leads Price. Always.

 

- Spydertrader

 

And price continues in a straight line while these "volume sequences" complete? I'm questioning your terminology here. You've not shown any volume sequence that isn't coloured by price. For me that's a price and volume sequence. Do you understand what I am saying?

[Spydertrader 10]

And price continues in a straight line while these "volume sequences" complete?

 

I don't recall mentioning anything about Price moving in a 'straight line.'

 

Price continues within the trend unless (and until) the Volume Sequences complete.

 

I'm questioning your terminology here.

 

Always a good idea to understand the vocabulary words before moving forward.

 

You've not shown any volume sequence that isn't coloured by price

 

Perhaps, viewing Volume Bar coloration through the lense of Price bar Open and Close isn't the path you should be taking.

 

For me that's a price and volume sequence.

 

Default settings on charting software do not necessarily provide the best view of all the information the market conveys.

 

Do you understand what I am saying?

 

I think so. It appears as if you 'see' these Volume 'colors' as a function of Price (however one's software chooses to color the individual bars). If using 'color' causes a roadblock for you, another set of vocabulary words also provides sufficient direction. In the attached, substitute 'deceleration / acceleration & deceleration / acceleration' for 'B2B 2R 2B' or 'R2R 2B 2R' in the Volume panes.

 

The vocabulary words used to describe the Volume Sequences do not play as important a role as the sequences themselves.

 

Some have even described the sequences as "hiking up and down mountains."

 

HTH.

 

- Spydertrader

 

[euclid 10]

Thank you for the clarification. You have confirmed that you are actually using price. In fact, in every example you have shown here the volume pane is entirely redundant. I doubt you will be able to see that, so it would be pointless for me to further divert your thread.

[BlowFish 10]

Firstly good luck with the thread. You wont need it, nonsense isn't courted here.

 

I have always thought that the labelling of volume sequences one of the areas that could have increased clarity. The volume segments 2R and 2B have different meanings depending on context. To make sense of any element or pair of elements in the sequence you need to look back until you discover B2B or R2R.

 

Of course things aren't going to change, but If you labelled each segment in the sequence with a 'vector' things would be much clearer imho. So each term would have

 

Volume annotated

(D) Diminishing or

(I) Increasing

 

Direction annotated

® Down

(B) Up

 

So a down trend would be

 

DR IR DB IR

 

An uptrend would be

 

DB IB DR IB

 

The beauty of this is it allows you to look at any part of the sequence and know where you are without having to 'look back'. You could bracket (DR IR) to signify that the sequence has changed direction if you like. When I studied the material I went as far as ditching R and B in favour of (U) up and (D) down. After all the colours are a visual aid. You then have DD ID DU ID. It 'sounds' better in my head too, of course it makes communication with other practitioners difficult as you need to 'translate'.

 

Anyway I don't want to derail things but back in the day when I was trying to figure out this approach I found this difficult, partly because I found that particular annotation counter intuitive. Most of the rest of the terminology I thought was well chosen and so, intuitive.

[Bil Gadzooks 10]

'Vocabulary' and 'words', I understand, but not 'vocabulary words'.

[BlowFish 10]

I think what is meant is 'lexicon' which is a languages words and common expressions

[Spydertrader 10]

Attached, please find an ES five minute chart for today (07/06/2009) containing Highlighted Areas where the market formed some of the formations outlined within the 'ten tapes' attachment posted earlier in the thread.

 

- Spydertrader

 

[Spydertrader 10]

We begin the process of learning to annotate tapes (skinny lines) onto a chart simply by applying the template shown in the 'ten tapes' attachment posted earlier in the thread. As the focus is about learning to contain Price at the fastest trading fractal (and since the focus, at this point, is to develop the skills required to annotate correctly and consistantly) No need to focus on volume at this time. Simply, go along - bar by bar - in an effort to place tapes across the entire trading day. No need to build traverses or channels at this point. For now, just focus on tapes. Since the market was kind enough to provide at least one example of every type of tape, we have all the possible combinations of two bars shown in one trading day. For practice, Do the entire day.

 

- Spydertrader

 

[Spydertrader 10]

For those interested in Volume compared to Volatility, please see the attached results. Anyone interested in replicating these results can do so in the following fashion:

 

Take 20 days of ES 5 minute data using Volume and Volatility (around 1600 bars). Sort the data from highest to lowest (by Volume) - in descending order. Now break the data into deciles. Extreme represents the highest decile with VDU (Very Dry Up) representing the lowest decile (or lowest 10% of all Volume Bars). Fast, Medium, Slow and DU (Dry Up) each have 2 deciles as shown on the attached. Record the Volatilty levels for each decile and the number of bars at each Volatility level within each decile.

 

As one can see on the chart, as Volume increases (from bottom left to top left) the individual bell curves for each decile shift to the right (increasing Volatility).

 

- Spydertrader

 

[dkm 10]

We begin the process of learning to annotate tapes (skinny lines) onto a chart simply by applying the template shown in the 'ten tapes' attachment posted earlier in the thread.

 

- Spydertrader

 

 

For clarification, there appear to be discrepancies in your example tapes compared with the template posted earlier:

 

tape to bar 6: the template (F) shows a horizontal dotted red line to an FBP

tape to bar 7: bar 7 is an outside bar and the template (D) shows diverging lines

tape to bar 12: bar 12 is sym pennant and the template (G)shows converging lines

 

Applying the template as provided gives tapes as shown on the attached clip. Could you please explain why you drew tapes that are different to as shown on the template.

 

Thanks.