CLIMAX VOLUME

Volume displayed at the base of a chart is like having inside information. If a large organisation decided to sell 200 million euros there would only be a few individuals likely to know about this amount of volume preparing to go through the market.

Although it is unlikely that you will be able to enter a position parallel to such large orders, the traces will undoubtedly show up on the chart as opportunities worth following.

Volume is a great confirmation tool helping to confirm support or resistance and display it in such a manner that the level becomes a key level which stands out visually on the chart. If a key level is found and the following trading session is accompanied by high volume at that level, this alone adds confidence in the decision that the level is where other traders and investors are buying or selling on the market.

Volume in conjunction with indicators and candlesticks can support the technical set up. High volume confirming candlestick signals, pattern break out points and major support or resistance levels are often decisive on a chart, leaving little alternative. For example, a high volume engulfing candlestick pattern has more conviction when it is seen with higher volume, or a break out from a pattern tends to see a decrease in volume shortly before the break out after which volume should pick up, an important clue. Patterns that are difficult to interpret might be better interpreted by studying the volume activity. Any increase in activity when price breaks out of the pattern is an indication of continuation.

Climax volume is used here to determine when a move in the market is over and when the market may be starting a new direction. A large increase in volume tends to occur at levels where the market buyers or market sellers outweigh the other creating a larger amount of buying or selling pressure than usual.

Figure 5.1 opposite demonstrates quite well how the bullish engulfing candlestick has more conviction when it appears together with high volume. A peak in volume, or climax of volume, can help confirm decisively an area of support or resistance.

Climax volume as a signal for support levels or resistance levels, as in the example shown in Figure 5.2 opposite, demonstrates how useful the confirmation is at the resumption of a trend and during a break out from an ascending triangle, for example.

Likewise, a high volume harami candlestick or a high volume bullish engulfing day reveals important clues about market conviction.

Where patterns are difficult to interpret and lead to uncertainty volume can help confirm the pattern during the break out. Applied to a pivot point, volume can be a decisive instrument in gauging the strength of a pivot line, leaving an important level to watch for future reference. A final point of contact is likewise better confirmed when seen with higher volume.

In Figure 5.3 on page 164, the volume climaxes at the point where the market is finding support. At this level the volume is enough to turn the market and although the volume tends to decrease during the upwards trend, it is consistent to begin with

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Engulfing candlestick on high volume

(source MetaQuotes Software Corp)

Figure 5.1 GBP/USD daily chart with volume spikes or climax volume.

(source MetaQuotes Software Corp)

Figure 5.2 EUR/USD daily chart with high volume harami candlestick pattern and high volume engulfing candlestick. When the price action moves lower it attracts buying pressure.

164 Trading and Investing in the Forex Market Using Chart Techniques

(source MetaQuotes Software Corp)

Figure 5.3 USD/CAD daily chart demonstrating a pivot line with volume which confirms the level.

(source MetaQuotes Software Corp)

Figure 5.4 USD/JPY daily chart showing the break lower from the first day of the month pivot high/low. A slight increase in volume during this break out is good confirmation but not nearly as good as the volume that appears later when the market has moved lower and finds major support.

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(source MetaQuotes Software Corp)

Figure 5.5 EUR/JPY 15 min. chart displaying high volume levels.

and then drops off creating a kind of divergence between the price action and the level of volume, i.e. buying and selling pressure.

Feeling the market on climax volume is another useful way to confirm a major support level. Observing this type of market action on a daily chart will certainly provide confidence in market timing. The same applies to volume on short-term charts. High volume not only confirms support and resistance levels but also confirms break out areas on short-term charts.

The climax in volume in Figure 5.5 suggests that a line of support has been found and verifies the move that follows. In this example, a level of support has been established and confirmed by the increase in buying pressure. If the market returned to this level on strong volume it would be a sign that the support may be waning. The technical level should already be known and displayed on the chart before the market reaches the level; the increase of volume then confirms this level.