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As long as there are markets to be traded, traders around the world will continue to devise new and innovative ways to forecast price behavior. Why? Because, in simple terms, this is all trading is about. To try to interpret, using a variety of techniques and indicators, where the market is going next. If we can predict this with any degree of confidence, the rest is plain sailing. And in this chapter, my purpose is this - to explain the power of volume price analysis. To explain what it is, why it works, and how you can harness its power in your own trading. And by the end of the chapter, I hope you will be convinced of its effectiveness. It is the approach I have used for over 20 years, and which I continue to use in my own trading and investing, every day.

Using VPA will, not only give you the power to read the market, but also to profit accordingly. As the quote above says ‘where there is panic, there is also opportunity’ . Volume price analysis will give you the tools and techniques to profit from each and every opportunity.

Before we start let me just say if you think using volume and price as a trading method is a new concept, think again. This was the approach used by some of the greatest traders of the past. Traders such as Charles Dow, Jesse Livermore, Richard Wyckoff and Richard Ney. Between them, these iconic traders span over a century of trading history, and they all built huge trading fortunes using one simple principle - what they referred to as tape reading, and what we would call volume and price analysis. For them, the ticker tape conveyed all the information they needed in terms of the price quoted, and the number of shares bought or sold. In other words, price and volume.

From these two simple pieces of information they were able to construct their charts and build a picture of the stock or the commodity they were trading. Traders such as Jesse Livermore traded directly from the tape itself. No computers, no electronic prices, and no electronic charts. It was a manual process from start to finish with hand drawn charts, and an intuitive grasp of price behavior based on years of experience of watching the tape.

For us, life is much easier. We have our electronic platform which delivers prices and the associated volume instantaneously. All we have to do is interpret the relationship, and act accordingly.

Let me start with an analogy, which although not perfect, will I hope explain some of the principles of volume price analysis, and the power the simple logic of this relationship conveys to us as traders. Imagine it is the week before Christmas, and you are the manager of a large department store in the middle of town. In the run up to Christmas, sales have been very disappointing, and you decide something needs to be done. Your solution is to have a sale as soon as the holiday is over.

In order to ensure its success, you choose which products will be in the sale, and the discounts. Then you launch a big advertising campaign to let everyone know the day after Christmas you are holding a sale, and many items will be available at big discounts. What happens next?

Overnight, queues of eager shoppers begin lining the pavement, keen to be first through the door when your store opens in the morning, so as not to miss out on these great bargains. Finally it’s time to open the doors, and the shoppers flood in, snapping up the bargains and buying everything in sight. Very soon some items are sold out as the buying frenzy continues, until finally you close at the end of the day. Using the simple mechanism of a sale, you have been able to boost sales dramatically, simply by lowering prices substantially and attracting customers as a result.

This simple analogy is from the ‘real world’. It happens in every retail market, from the smallest market stall, to the largest superstore. It is the direct relationship that exists between price and volume, and which is often explained by economists as the ‘price elasticity’ curve. In our language it means this - lower the price of an item and you attract more buyers, raise the price, and you attract fewer buyers. At this point, I want to make one thing crystal clear. This is an imperfect analogy from a trading perspective, but I have used it here to explain the principle of the link between volume, which in this case was our buyers, and the price of the goods being sold, the price.

Now let’s take another example from the world of retail, but this time something very different. Imagine you have designed and built a limited edition exclusive car, which is being launched in a few months time. You are happy to take advance orders for the car, which is highly desirable, but you are only manufacturing a limited number of these cars. What happens? As the launch date approaches, those people who have pre-ordered their cars, are now selling them at higher and higher prices, ahead of the launch date. In other words, those people desperate to own one of these cars are forcing the price higher. Again whilst not a perfect example, I hope you can begin to see the relationship that exists between ‘volume’ and ‘price’. In our first example, prices were falling and volumes were rising, whilst in the second case, prices were rising with rising volume.

The two examples above, highlight one of the key principles which underpin the entire volume price relationship which put simply is this. If we think of effort as volume, for a market to rise, takes just as much effort as for a market to fall. The reason many traders struggle with this concept is we are all used to gravity, and this is fine when using a simple analogy such as driving up a hill. Here we have to apply more pressure to the accelerator in order for the car to overcome gravity. In other words, we are increasing the effort in order to move uphill. This is a simple concept to understand and can equally be applied to the market. It takes effort for the market to move higher.

However, when we try to apply the same analogy to a market that is falling, the car example simply does not work, since gravity takes over. In the markets it is very different, since it takes just as much effort (or volume) for the price to fall, as it does for the price to rise.

All of this is encapsulated for us in one of the three principle rules of Richard Wyckoff, one of the founding fathers of tape reading and volume price analysis. This states that:

..“simply stated, if there is an effort, the result must be in proportion to that effort and can not be separated from it. If it is not, it is an indication of other principles in action. Think of effort as the volume on a move, and the result is the corresponding price action. These two should be in harmony. If you have a lot of volume, you should see a lot of move, if you don’t…why? What is happening? This is where we become the detective, use our tools, evaluate that price action (result), with the corresponding volume (effort), and make some deductions based on the balance of probabilities”.

This is the law of effort and result, and is the bedrock on which volume price analysis, or what I refer to as VPA is built. But what does this law mean? If the market is going higher, we should see this reflected in increased volume. If the market is moving lower, again this should be reflected in increasing volume.

In other words, the price is validated by volume. If the price is moving higher supported by strong volume, we know it is a genuine move higher. If the market is moving lower, again on strong volume, we know this is a genuine move lower. Without volume, we would not be able to validate price, and this is the insight volume price analysis delivers.

On its own, a price chart is just that - a price chart. We may see the market moving higher or lower, but is this a genuine move? We have no idea. Equally, if we remove price, and simply look at volume. On its own, does volume reveal anything? After all, if I told you that in the stock market there had been 500,000 shares sold today, would this reveal anything about the stock? And the answer is no, even if I told you the day before, only 250,000 shares had been traded.

Volume on its own is just that. It could be the number of shoppers in our store earlier. It is just a number. Equally price, is just the latest price, and tells us little, other than where price has been in the past, but not where it may be going in the future, which is what we need to know. However, combine volume with price using VPA, and we have an explosive combination giving us the power to forecast future price action with confidence. But how do we do this?

You will be pleased to know that in applying VPA to a chart, we are only searching for two things. Either agreement, or disagreement between the two. Confirmation of the price action by the volume, or a signal of an anomaly.

If volume is in agreement with the price, then this is a valid move, and we know it is genuine. Conversely, if there is disagreement, or an anomaly between the price and volume, this is not a valid move, or it is sending us a clear warning signal of a potential change in trend. From this simple principle everything else in VPA then flows. Using this approach we can forecast with confidence, turning points, reversals in trend, strength and weakness, and when combined with Japanese candlesticks, we have the ultimate tool set and methodology for forecasting and confirming future market direction. And perhaps more importantly, we know what the market makers (the big operators or insiders) are really doing.

And the good news is both price and volume are free on every platform. The Japanese candlestick is the visual representation of price which brings the technique of volume price analysis together on our charts, giving us the tools to truly forecast where the market is going next. And the reason is simple.

Volume and price are both considered to be leading indicators. In other words, they lead the market. Every other indicator that has been developed over the years lags the market in some way. Volume and price do not. They are at the leading edge, and in using their combined power in VPA, they deliver the ultimate methodology for answering the question we all ask ourselves each time we trade which is - ‘where is the market going next’?

It is volume which is the fuel that drives the market, both up and down. If there is no fuel the market will not move, and if it does, this is a trap set by the market makers, of which more shortly. All you need to remember is when we combine volume and price, we can see how much ‘fuel’ is being applied to the move. If there is a great deal of volume, the move or trend will develop further. If there is none, or only a little, equally the market will not move far. These are examples of the price and volume relationship being in agreement. However, as I mentioned earlier, when the volume and price relationship disagree, this is when the warning bells really start to ring. This is VPA sending a strong signal of potential changes in trend, allowing us to prepare, and get ready to enter or exit the market.

This ‘disagreement’ may be as a result of weakness in the market, or , the market makers trapping us into a weak position, and this is where we use our VPA techniques to identify their activities, which I mentioned in the opening chapter. Volume is something they simply cannot hide. They can hide many of their other activities, but volume reveals the truth of the price action, and when the market makers are manipulating the price action to trap you on the wrong side of the market, volume will tell you this instantly. And when combined with price using VPA, you will have the ultimate tools to see this in action on every chart, from one minute to one month. It is there for all to see. All you have to do is to interpret the volume and price relationship and understand the clear signals it is sending. This is what you will discover in the remainder of the chapter, and more fully in ‘A Complete Guide To Volume Price Analysis ’

At this point, you may be thinking, ‘well this is all very well, but I have been told that there is no volume in the spot forex market, and to a point you would be right. After all, there is no central exchange in the spot forex market, and therefore no recorded volume of trading activity. However, even if there were, what would the exchange report? The actual currency amounts being bought and sold, the number of transactions, or some other measure? How do we handle this problem, and more importantly how does our MT4/MT5 platform deal with this issue?

Fortunately, in the spot forex market we have something called tick data. In simple terms a tick is counted each time there is a change in price. When the currency pair on the chart registers a change in price, this is registered as a tick. In the currency market, the smallest price movement used to be a pip, but as we saw in an earlier chapter, pairs are now quoted in tenths of a pip. These changes in price are then represented as vertical ‘volume’ bars at the bottom of the chart, and the question is whether this is a valid ‘representation’ of volume?

However, let’s think about this logically, and perhaps with an extreme example. Suppose we are trading in the GBP/USD, and the price changes twice in an hour. Would you say this is a market with a great deal of activity? No, of course not. This would make trading a very dull business, and no one would ever make any money.

But suppose we are trading the GBP/USD again, and the price changes 100 times in 10 seconds. Would you say this is a market with a great deal of activity now? Yes, of course you would.

Because activity, (or the lack of activity) is the same as volume, in my opinion. After all, if we go back to our analogy earlier with the department store, all you would need to check is the cash register to see the activity or volume of sales on the day. You would not need to physically be in the store, to see the shoppers coming and going. The cash register ‘activity’ would reveal everything. If there were many sales made, this is activity and would only have been achieved with a high volume of shoppers. Equally, if the cash register only revealed a few sales made on the day, this is low activity, which equates to a low volume of shoppers in the store. To me, activity and volume are one and the same.

It’s the same with the tick and the currency pair. Consider this example. Take a one minute chart and on one candle we have 100 changes in price recorded, but some time later with a similar candle there are only 20 changes in price recorded. We can infer from the ACTIVITY = VOLUME relationship, in the first example the volume was high, and in the second example the volume was low. It really is that simple. Tick activity is volume, and this is what we use on the MT4/MT5 platform, and indeed many others too.

Over the years there have been many studies to equate activity to volume, and how truly this relationship represents what is actually happening. It has been shown, time and time again, tick activity is between 85% and 90% representative of the true balance of buying and selling in the market. However, let me be provocative for a moment. Even if it were less accurate than this, do we care? And the answer is no, because with volume we are comparing volume bars, one with another. Is this one higher or lower than what has gone before. In other words, provided we are using the same platform, even if the data is less than perfect, provided we are simply comparing one volume bar with another on the same platform, then does it really matter if we have less than 100% of the volume/activity information? And to me and fellow volume traders it does not.

A further question you may have about tick activity or volume is this. Does it vary from broker to broker? And the answer is, yes it does, a little. But again, provided you are simply using one platform, and comparing the volume bars on the same broker platform, this is not significant. We are comparing apples with apples.

So, let’s get started and begin with some simple examples which I hope will start to paint a picture for you of the power of VPA.

Here in Fig 6.10 we have our first chart, and as you can see, we have our candlesticks displaying the price action, with an up candle in blue and a down candle in red. Every charting package will give you the option to paint your candles to your own preferred color scheme. My preferred is blue for an up candle and red for a down candle. So when the price closes higher over the 15 minutes the chart paints this blue, and conversely when it closes lower over the period, the body of the candle is painted red (or whatever color you have chosen).

Now, the same applies to the volume indicator which is shown below, and simply reflects whether the candle associated with the volume bar is an up candle or a down candle. This is not critical, and indeed some traders prefer to have the volume bars all the same color. If this is the first time you have ever seen volume on a chart, one thing is instantly apparent, namely the variation in the height of the volume bars. This is the essence of analyzing volume. In our VPA analysis, all we are doing is comparing the heights of the various volume bars, against one another to see whether they are very high, high, average, below average or low. From there, we then move to compare the volume bar with the associated price action, and draw any relevant conclusions from this analysis.

This is one of the many beauties of volume price analysis or VPA. As humans, we have an inbuilt ability to judge differences very quickly and process this information fast, often in milliseconds. A quick glance at the above chart, and your eye will instantly be drawn to those extremes - the volume bars that stand out, either because they are high or low. These are the ones we are always looking for, as this is where we start to uncover the secrets of what is going on inside the market, once we compare this with the associated price action.

The dotted line you can see in this example is simply a guide to help define what can be considered, ‘above average’, ‘average’ or ‘below average’ and this will vary from trading session to trading session. After all, the average volumes in a very busy trading session, when the European, and London markets are open, will be much higher than in an overnight session in Asia, where trading volumes and activity will be much lower. This is something we always have to bear in mind when considering volume. But again, all volume is relative, so whilst a high volume bar in the Asian session may be 500 ticks for example, in the London session, this might be below average. The point is this. It is all relative, as we are always comparing one bar with another. The only time this will become apparent is when looking at an intraday chart that covers different sessions, in which case you will then see this reflected in the volume and clearly visible.

Returning to Fig 6.10, and the two candles I would like to focus on here, are those in the middle of the chart labelled ‘Candle 1’ and ‘Candle 2’, and the associated volume. If we take Candle 1 first, what do we have here?

Candle one was a wide spread down candle which closed with a nice wide body. Clearly over this period of 15 minutes the market was bearish on this pair, with the Aussie dollar being sold and the Japanese yen being bought. Moving to the associated volume, we can see the volume bar is very tall, and almost double the ‘average’ and well above our dotted line. The question we now ask ourselves is very straightforward. Is this what we should expect? And in this very simple example the answer is, yes. A ‘big’ change in price has been matched with a ‘big’ volume bar. In other words, the price action has been validated by the volume. Price and volume are in agreement here. The second reason I chose this example is to make the point, which I stressed earlier in the chapter, is volume (effort or activity) is required for a market to move lower as well as higher.

Moving to Candle 2 and the volume bar. The volume bar is exactly the same as for Candle 1 in every respect. In fact, it is identical, and therefore we should expect to see a wide candle on our price chart. This is most certainly not the case. What has happened? After all, if the price action on Candle 1 ended with a wide body, why has Candle 2 ended with a narrow body and a deep lower wick. Is the volume and price relationship in agreement here? And judging from the previous candle it would appear the answer is no. If the volume bars are identical, we should expect to see an identical candle also, which is clearly not the case. The alarm bells are now ringing, as we have a disagreement in the volume price relationship which requires further analysis.

Therefore, what has happened here? Let’s think about this logically.

The market has opened from the previous candle, moved a little higher, and then fallen, before recovering to close just below the open, and ending with a narrow spread body and a deep wick to the underside of the candle. Do you recognize this candle? It’s a hammer candle. During this 15 minute period, the AUD/JPY pair had been moving lower, but then started to move higher. How is this possible? And the only conclusion we can draw is that at some point in this session, the sellers were overwhelmed by the buyers. Buyers have come into the market and stopped the sellers moving the pair lower, and you can compare this in some respect to our department store example. The store puts on a sale, reducing its prices, and in come the buyers, spotting a bargain. After the sale, the department store puts its prices back up again. Another analogy which might help you to put this into perspective is the old fashioned tug of war.

Remember the analogy of the hammer candle as a tug of war between the sellers and the buyers, the bears and the bulls. The two teams of eight take the strain on the rope and the white marker in the middle of the rope defines the mid-point. The referee blows his whistle and the two teams start to pull. Using Candle 2 as the example, the sellers take control initially, and urged on by their coach pull the white marker further and further away from the mid-point, and look as though they are about to win the contest. Suddenly, the buyers find reserves of energy, and slowly but surely begin to pull the rope back towards the middle again. The sellers are tiring and the buyers find further strength, pulling harder and harder on the rope as the sellers lose their grip. Finally, the referee blows the whistle and the tug of war ends with the sellers, just winning on this occasion. This in simple terms is what is happening here.

We know from our earlier examination of the hammer candle, that in itself the candle is suggesting a change in price, as the buyers come into the market. However, based purely on the price action, we have no idea how strong this change in sentiment might be. But suddenly with volume, we can see instantly this is a major reversal. Why? Because the volume is extremely high, and VPA is therefore sending us two clear signals. First, based on price which is signaling a possible change in trend, and second with volume this is potentially a significant change. After all, if this were not the case the volume would be low. Clearly the volume of buying here has been high, it must have been, simply to absorb the high selling volumes, and it must be buying volume as the price has recovered from the low of the session to close back near the open.

This is the analysis we execute on each and every candle and associated volume bar, and in this simple example, I hope I have managed to convey to you the power of volume price analysis. On their own, each is a leading indicator. Price reveals where the market is now, and volume reveals the activity now. On their own, they are simply that - measures of where we are now, but combine them together using VPA, and suddenly we have an immensely powerful, predictive technique which reveals, not only changes in market direction, but also the extent and validity of the change. And by extension, whether the market makers are participating.

We know the hammer candle on its own could simply be the market makers manipulating the price for their own ends. In this example this is not the case. We know this is a genuine move, as the volume is extremely high, so clearly the market makers are joining in. This is what volume also reveals. It reveals the activity of the market makers. If the price action is genuine it will be seen in the associated volume. If it is false, and a trap set by the market makers, we will see this in the associated volume. Activity cannot be hidden. It is there for you to see on your charts. All you need to do is to understand VPA and apply your analysis accordingly.

In the above example, the pair moved sideways for a period, before finally moving higher, and as always we have to remember that the market is like an oil tanker. It often takes time for any change in trend to develop, so do not be surprised if this does not happen immediately. This was one of the lessons I had to learn myself when I first started studying and using VPA. In our first example, Candle 2 was our early warning signal. Our VPA analysis is telling us very clearly to ‘pay attention ’, and from there we continue to read the market over the next few candles, and prepare to take a position in due course.

Now let’s look at a second example in Fig 6.11.

Once again the two candles to concentrate on are shown as, ‘Candle 1’ and ‘Candle 2’, and of course you should recognize these instantly as two shooting star candles. We already know from the price action alone, that a shooting star candle is a potential sign of weakness in the market, since here we have the exact opposite of the hammer candle. If we go back to our tug of war example, in the case of the shooting star it is the bulls (the buyers), who are initially in control at this point, before the sellers (the bears) come into the market at this level. The buyers have pulled the rope well away from the mid point, before the sellers have found some strength and slowly but surely pull the rope back towards the mid point once again. This is the price action in the shooting star candle. At this point, we are already paying attention, just from the price action alone.

Then we check our volume on Candle 1. It is well above average, so the market is weak at this level, and it is genuine weakness as signaled by the volume. The market makers are selling here. Selling into a weak market. The alarm signal has been sounded. Because if this volume had been buying volume, then the market would have closed with a wide spread up candle. It didn’t. The pair closed with a shooting star candle. Clearly the market is showing weakness at this level.

Then we get a repeat performance. A second shooting star, but look at the volume, it is ultra high. If this had been buying volume, the market would have moved higher with a wide spread up candle. It hasn’t. It’s closed marginally higher, but with a deep upper wick, and a further sign of weakness. More selling has appeared, overwhelming the buyers once again. Even more significant, the volume on candle two is huge, and is standing like a telegraph pole above all the others. This is a massive signal, and clearly sending a message the market is now very weak and preparing for a potential reversal. The market makers are selling at this level and so should we, so we join them and take a short position. (A ‘short’ position is when we sell the currency pair - conversely a ‘long’ position is when we buy. We sell, or go short when we think the market is going to fall, and buy or go long when we think the market is going to rise). This is the power of VPA once again.

The logic and power of our VPA analysis is inescapable.

The currency pair has risen when initial weakness appeared on Candle 1. The volume tells us the market makers have also seen this weakness and are selling. We are ready and waiting. Candle 2 forms, and if we weren’t paying attention before, we should be now. The market makers are now selling heavily into a weak market. How do we know? Volume. How do we know the market is weak? Well two reasons.

First, the price action is telling us so with the shooting star candle, and second, if the volume had been buying volume, the market would have closed higher with a wide spread up candle. The volume associated with this candle must therefore be selling volume. The market makers are preparing for a fall in the pair, and on this occasion the market moves lower almost immediately.

This example also raises a couple of other points which I think are relevant at this stage of our VPA journey. The first is this.

When we see two (or more) of our primary candles, one after the other, this is giving us an even stronger signal of a reversal. A shooting star or a hammer candle on their own is good news, and we start to pay attention, but if we see a second, or even a third in the same price region, this confirms the strength or weakness exponentially. The candles do not have to follow one another immediately, but if we see weakness appearing, later confirmed by further weakness, as the market prepares to reverse, this is sending an even stronger signal. In other words, the weakness has been validated if you like with further weakness.

The other point I want to make here, which I referred to earlier, is the concept of the ‘relative’ nature of volume when we are studying a chart. In Fig 6.10, the volumes associated with Candles 1 and 2, were very high as the market unfolded at the time. However, as you can clearly see from Fig 6.11, with the market moving on, and our ‘telegraph pole’ of volume on Candle 2, the volume here is even higher, forcing the other candles that have preceded it, lower, as volume is always relative. Indeed, it could be the case an even higher volume bar might appear later, and this is in fact what happens. Four candles after the appearance of our two shooting star candles, with the market moving nicely lower and a very solid profit from the position, we were then presented with a hammer candle, with volume which beat the previous high, and here it is in Fig 6.12.

As you can see we had, what I call, a ‘price waterfall’ which lasted for an hour, before the hammer candle arrived, with extreme volume. The volume is above that of our earlier bars, and also above those candles associated with the move lower. In addition, and the point I really wanted to make, was the volume of our first two candles in Fig 6.10, has now been reduced in proportion. Does this matter? The answer is no, as everything is relative, and at the time the volume would have been well above average. However, we always need to bear this in mind. Volume is always relative, and in moving from one session to another, a high volume bar in one session, may only be average in another.

The reason the volumes have increased significantly, is simply during the writing of this section of the book the markets moved from the London open to incorporate the US markets, reflecting increased activity. Finally just to round off this point, as you start to study these charts on a daily basis, and in different timeframes, you will very quickly develop your own view of what is ultra high, high, average or low volume, and this is where the MT4/MT5 platform steps in to help.

On the left hand side of the volume indicator the tick count appears live in real time, and this changes from timeframe to timeframe. In addition this information is also shown on the scale on the right hand side of the indicator, so both of these will give you a perspective on the associated volume.

Having considered one or two individual candles, I now want to look at a series of candles as they build into the complete picture of VPA on a chart. Fig 6.13 has several interesting points, and is from a 5 minute chart of the GBP/USD.

As you can see we have five ‘phases’ of price action, and this example highlights the importance of volume and price action when we are considering the relationship over a series of candles as the price action builds. Let’s start with a market that's rising, as this is probably the easiest to understand. If the market is moving higher, candle by candle, then this should be accompanied by rising volume for the move to have any momentum. In other words, rising prices and rising volume. If the market is rising on falling volume this is an anomaly.

Volume is the fuel of the market, and if there is little or no fuel in the tank it's not going to move far. To use another analogy, it’s similar to the way you feel in the evening after a hard day at work - lacking energy and rather tired. This describes a market attempting to rise on falling volume. It is sending you a clear signal of weakness. If the market is moving higher on rising and strong volume, the market makers would also be joining the move, but since the volume is falling, clearly they have withdrawn. A potential trap is being laid for the unwary trader. A market moving higher on falling volume is not going far.

The same applies to a falling market. If the market is falling on falling volume, it's not going far either. It takes effort to fall as well as rise. A market falling on rising volume has momentum. For a market to fall far and fast, we expect to see volumes rising as the market falls. If volumes are falling in lockstep with the price action the market makers are not involved in the price action. They are not selling, and it is a trap move, or a market that is simply tired.

Let’s take a closer look at the price and volume in Fig 6.13 and the five phases of VPA action.

In phase 1, the pair has fallen for five consecutive candles, with a variety of spreads, but the volume is generally rising in agreement.

Volume is validating the price and confirming this is a genuine move lower. The market then pauses in phase 2, and attempts to rally, but the rally is weak. Why? Because the rising candles are associated with falling volume, which is therefore in disagreement with the price action. What signal is this sending to us? Well first, we have an anomaly, rising prices and falling volumes, and second, given this fact, this is likely to be a short term reversal higher in an otherwise longer term trend lower. After all, if the rally higher were to have momentum then we should expect to see rising volume, and not falling volume. Here the primary trend is bearish, and the secondary reversal is just a pause point before the primary is re-established.

At this point, let me introduce another of the powerful features of VPA which, whilst self evident perhaps, is still worth making here. Suppose we have taken a short position in the market (we have sold), at the start of the price waterfall lower, and are now watching the market recover slightly. How can VPA help here? The answer is straightforward. VPA gives us the confidence to hold our position and not to panic or close out and take our profits ‘off the table’ (in other words to close our position). VPA helps to overcome those emotional trading decisions we all suffer from time to time, and allows you to become a trader in control of your emotions.

Holding any position to maximize your profits is key, and one of the issues we will be considering in the section on money management and risk. This is the power of volume price analysis, because if your analysis is clearly telling you the reversal is not likely to move far against you, in other words a secondary trend reversal or pullback, then why panic. You have applied simple logic to the chart using VPA and with falling volumes and rising prices you do not expect phase 2 to last for long. And as we can see shortly after, the downwards trend resumes in phase 3. Our primary trend has been re-established. This is how markets move all the time. They never, ever, move in a straight line, but constantly move higher and lower in a series of steps, of which this is a simple example.

In phase 3, once again we have agreement between price and volume, with prices falling and volume rising. Volume is confirming this is a genuine move, with the market makers selling into the move lower.

We then move into phase 4. Is this a genuine reversal, or a second pullback in the longer term primary trend? And once again volume gives us the answer. This is yet another minor reversal, as the rally higher is accompanied by falling volume, a clear signal the market makers are not involved in this move. Some traders will have either closed existing positions, or taken new long positions, thinking the market has now reached the bottom. It hasn’t. Our analysis tells us clearly this is not the case, and we move lower still, and into phase 5.

At this stage the volume price relationship is once again back in agreement, as the market moves lower with rising volumes. Finally on the right of the chart we move into a consolidation phase, which I am going to explain shortly.

This is the power of volume price analysis. Not only does it tell you where the market is going next, getting you into strong positions, it also reveals the extent of any pullback or reversal, thereby helping to keep you in. Finally, as you will see in a moment, it also tells you when to get out. Using two simple indicators gives you all this and more, through the power of simple logic and common sense. What more could we want as traders, which is why I have been a devotee of using volume and price for over 20 years. I hope in this short introduction I have convinced you too, but you can discover more by reading my book, ‘A Complete Guide To Volume Price Analysis ’, which expands on this introduction to the topic. However, I hope this has at least provided you with enough of a flavor to want to learn more. Since writing A Complete Guide To Volume Price Analysis, I have written several others which contain hundreds of worked examples in all markets and timeframes for stocks, forex and cryptocurrencies, and you can find details on these in the back of this book, or alternatively on Amazon. All are available in either Kindle or paperback.

Before we move away from volume price analysis, there is one other concept I would like to cover here in more detail, and this is known as support and resistance.

Markets generally move in one of three ways, either up, down or sideways, and of these three it is the last where they spend most of their time. Many forex traders are mistakenly told currency markets are strongly trending markets. Whilst this may have been true several years ago, this is certainly not the case now, for many reasons. Partly, it is as a result of the financial crisis of 2007 and the associated ramifications globally, and partly also as a result of changes in the way currency markets are now increasingly manipulated by a variety of forces.

As a direct consequence, any currency pair will tend to spend around 70% of the time moving sideways in a narrow trading range, and 30% of the remaining time trending in one direction or another. This of course occurs in all timeframes, so on a 5 minute chart for example, an extended period of sideways price action might last a few hours, whilst on an hourly chart, this might last for a few days. Many forex traders become frustrated, assuming incorrectly, a currency pair which is moving sideways is a trading opportunity lost. Nothing could be further from the truth. It is in fact a trading opportunity in waiting. Let me explain why with a simple example in Fig 6.14.

Let’s take a look at this chart, which is an excellent example to explain the principles of price behavior in these congestion phases, and why they are so important. If we start at the extreme left of the chart, the pair were mildly bearish, sliding lower, but note the volume, it is falling, so we know this phase is unlikely to last long. We then see a series of three ‘up candles’, with increasing volume, but on the third candle in the sequence, there is a deep upper wick, suggesting weakness. After all, if the market were strong, with this level of volume, the close should have been somewhere near the high of the session. It is not, and has closed at the mid-point, so clearly there is selling now coming onto the market. The following candle ends marginally lower, but with a wick to the downside, suggesting buying support at this point, and signaling this is probably a minor reversal in the longer term bullish trend.

The pair continue higher for the next four candles, but note the price action. The price spreads are narrowing, suggesting a market running out of energy, and indeed confirmed by the volume which is falling, not rising, as the spreads narrow. The volume is in agreement with the price action, in other words narrow price spreads, with average to low volume. But the volume is falling away in the move higher, so clearly the market is weak, and unlikely to continue higher, just yet. At this point we start to move into our congestion phase, and note the volumes throughout - they are extremely low. Buying and selling activity has died away completely as the pair wait for a catalyst to bring it back to life. The volumes are now simply reflecting the price spreads, with low volume associated with narrow spreads, which is as we expect. Remember, this is in agreement. A narrow spread candle should have low volume. High volume would be an anomaly, and an alarm signal.

As the market moves in this congestion phases, it creates two price levels on the chart. One above, which we call resistance, and is shown by the solid line, and the other we call support, which is shown by another solid line below. However, there are several questions here, not least, why we call them support and resistance, and why congestion phases are so important.

The reason any congestion phase is important on any chart, whatever the time frame, is simply that this is where trends are spawned and develop, before finally breaking out. The next phase may be a continuation of the current trend, or a reversal to a new trend and a consequent change in direction. It doesn’t matter. You can think of a congestion phase as the source of a great river, where salmon return year after year to breed and spawn. Once they are large enough they return to the sea to start their long journey around the world. This is why I always refer to these congestion phases in terms of salmon and their spawning grounds, as I believe this makes the point using a real world analogy. When the market is moving sideways, it's waiting, building its strength, and preparing to launch the next trend.

This is why these phases of price action are so important. We know the market is going to breakout from this price region, it's just a question of when, not if. As traders, all we have to do is to wait and be patient, which is often the hardest part. When we see a market in congestion, as in Fig 6.14, this is good news. All we need to do is wait for the signal of a breakout, which will of course be instantly apparent from our analysis of volume and price.

In creating these ‘channels’ of price action, the two lines of support and resistance are also created, and again we need to understand why these are so important, and the clue is in the name we give to these price levels, ‘support and resistance’.

In the above example, the pair has been moving higher, before entering our congestion phase, so any attempt to move higher at this stage of the price action, is considered resistance. In other words the market is ‘resistant’ to any move higher at this point. Equally, any move lower in the congestion phase is finding ‘support’, in other words the price action at this level is finding a ‘platform’ which is helping it to bounce back higher again. The two levels are rather like the first electronic games of ping pong, with two paddles on the screen, one left and one right, and the ping pong being bounced back and forth by the two players.

Finally, the catalyst arrives, which from memory was an item of fundamental news. This duly drove the pair higher, breaking out from this extended phase of price congestion with the wide spread up candle on the right hand side of the screen. Our first question at this stage is simply, ‘is this a valid breakout'? And the answer here is a resounding ‘yes’.

Because the associated volume is ultra high and in agreement with the price action, so a valid breakout is in progress. The market has ‘broken out’ from the congestion phase, and the ‘new’ trend is underway, only in this case it is simply a continuation of the current longer term bullish trend. The currency pair has risen, paused into the congestion phase, and with the catalyst of fundamental news, has broken out into the next leg up. But for how much longer? Well as you can see the volume is starting to fall away, as we move higher, so perhaps another phase of congestion is in prospect. We would now be watching and waiting.

There are several points which are key from the above and these are as follows:

The analogy I always use to explain the concept of how resistance becomes support, and conversely how support becomes resistance, is to use a house as an example. Imagine you are standing in front of a house which has two or three floors, and the front wall has been removed completely. What would you see?

If you've ever seen a doll’s house it would look much the same, with a cross section of each floor and ceiling now exposed. Imagine you are standing on the ground floor, and want to move up to the first floor. Above you is the ceiling, and if you cut a hole in the ceiling and climbed through, you would now be standing on the first floor. But what was the ceiling when you were on the ground floor, has now become the floor on the first floor. If you repeated this exercise and cut a hole in the first floor ceiling, and climbed through to the second floor, once again what was the ceiling at the first floor level, has become the floor at the second level where you are now standing.

This concept is very familiar to us, and rarely one we ever think of when we are in a building with several floors, but as we climb the stairs, what was the ceiling below is now the floor above. Equally, when we go downstairs, what was the floor above, has now become the ceiling from below. This is the principle of support and resistance which is at work on our price charts, and which is so important once the ceilings and floors (price levels) are breached.

Returning to our example in Fig 6.14, whilst the market was in its congestion phase, the upper line was the resistance level, and the lower line was the support level. However, as soon as the market broke out through the resistance level, the upper line immediately becomes a potential support level. In other words, going back to our house analogy, the market has moved upstairs to the first floor and the price resistance ceiling has now become the price support floor for a further move higher. This old area of price resistance has now become support, acting as a springboard, a platform if you like, to help the market move higher. At the same time it acts as a potential 'barrier' should the price retrace to test this level before moving away.

The reverse is also true. Had the market broken to the downside on this occasion, the floor of support, the lower line, would have become a resistance area in the future. What was the floor has become the ceiling as we move downstairs. It is these areas of dense price action which create the ‘natural’ areas of price support and resistance. These come into play, either immediately as the market breaks away, or later when the market returns to these areas in the future.

Which leads to the second point. When a market breaks away from one of these areas, we know this is an excellent trading opportunity, provided it has been validated with volume. Why?

Because these are the regions where trends are born and created. They are the regions where the market is pausing, waiting and preparing, building up strength or waiting for a catalyst, often an item of fundamental news. This is why they are so important. They are the launch pad for future price action. Not only do they offer excellent trading opportunities, but also provide the added protection of a natural price barrier above or below, which leads me to the next point.

These price levels are defined by the market. They are not our levels, but the market’s levels, and so as the market moves away from these regions, we have some natural barriers of price protection in place. In our example in Fig 6.14, the AUD/JPY broke higher, and on this occasion moved firmly higher on strong volume. However, what you will often see is the market move away, and then reverse back to test the ‘new support’ level (the old resistance level), before bouncing off, and moving away again. This is why these price regions are so important as they help define how and where to place any stop loss orders, to protect our position in the market. I will be explaining this type of order later in the book, but for now, just recognize the importance of these regions. They define the areas at which we can place our money management orders, and in this example we would place these somewhere below the lower line. In other words, the market has set this price level for us, by the associated price action.

And finally to the last point.

Having read the above description, where we've discussed floors and ceilings, which are solid structures, the last thing I want you to think is support and resistance levels on a chart are just the same. They are not, and you should think of them as rubber bands. They have some ‘give’ in them, both when applied to any price action and also in any subsequent price action when the market breaks away. This is why you always have to be careful and wait for a clear break, and not simply the point at which the price has just cleared either above or below one of these levels.

There are really two points in one here. The first is this. When drawing these levels on a chart, or applying the line to connect these points together, we do have to allow ourselves a degree of ‘artistic license’. In other words, technical analysis is an art and not a science, so joining up price points precisely is not what's required. What we are looking for is the general price levels only, not three or more precise points. A ‘best fit’ approach to placing the lines is fine, and don’t worry if some of the historic price action is slightly above or below the line. That’s the first point.

The second which follows on, is we have to wait for a clear break from the price congestion, before entering the market. Here it is generally a case of waiting for the first candle to complete, in whatever your timeframe, and then make a judgment based on the price action and associated volume.

In Fig 6.14, the currency pair has broken firmly higher, and once the candle has completed, we can assess the associated volume. Here we have a strong move higher, the price action is now well clear of the congestion, and we have excellent volume, so it is a valid move higher.

This is the analysis we carry out every time we see a congestion phase and subsequent breakout. The first point is how far the market has moved away, and the second is the associated volume. If the close of the breakout candle is well above (or below) the associated resistance or support level, and we have good supporting volume validating the price action, it’s time to make our move.

If you are a novice trader I would urge you to embrace the VPA methodology. I consider myself to have been immensely fortunate in my own trading career, having been introduced to volume and price analysis from the beginning. To me, it just made sense, and has done so ever since. It is a method I use in all the markets I trade, not just spot forex, but in futures and stocks. It is, I believe, the right approach, the only method that applies common sense and logic to the analysis, using two leading indicators. It will take you a little time to learn to become confident and proficient, but like riding a bicycle, once learned it is never forgotten.

I hope this chapter has helped you gain some insight into the methodology of trading using VPA, and also convinced you of its merits and power. As I mentioned at the start, if you would like to learn more, please study my volume book, which explains some of the more advanced concepts, and builds on what we have covered here.