Good Day Traders,
In this article I am going to make an introduction to the combination of volume and price action. Many traders ignore the changes in volume while they trading maybe because they don’t know its worth or maybe it’s a little bit difficult to understand it. I believe that a combination of the volume and price action maybe with an indicator as confirmation it’s the most solid way to trade.
You know there are so many volume indicators and obviously when you see bigger bars than the previous there is more volume. On the other hand, when you see smaller bars than the previous means there is less volume. I think that the first important thing which someone should know about volume is “climax”. So, what is “climax”?
When we have a big up movement in price with a big volume this is “a buying climax”. This means that many investors during the current candle are buying heavily. In the opposite condition we have the “selling climax”. A big movement down with high volume. This means that the investors in the current candle are selling heavily.
When is the right time to trade? As I said before in a buy climax the price can reach in very high levels. When the investors realize that the price is in a very high level and it’s overbought they start to sell heavily. This is the right time to trade in a case of up trend which is near the end. When you see the price near a resistance level (resistance, whole numbers, trend lines, EMAs) and a buying climax appears and after that you notice low volume or a selling climax maybe it’s time for the end of the up trend.
On the other hand, when the price is near a strong support level and a selling climax appears and after that low volume or a new buying climax maybe it’s the time for the end of the down trend.
So, the key ,as always ,is to buy in lows and sell in highs and with right volume reading and price action you can achieve this. Be careful, you should always wait to see what will happen “AFTER” the climax not during the climax appears. In the next article I will show you some good examples and I will explain you the volume indicator which I use. Stay tuned!
UPDATE: Click here for Part 2 :-)