GBPUSD Daily 20-11-09

GBPUSD closed one more time above the resistance level at 1.6680 on Monday but again take a look at the volume ... guess what ? Volume is clearly below average, less than the two previous day : no demand ! Unsurprisingly price drift down, close behind the level and friday, big sell off and close behind the test bar of last week.

Price should go down and test the support level at 1.6271 in the following weeks. Waiting for a no demand day in the range of the friday candle would be a great signal.

In conclusion, I am for a bounce of the dollar and if I need to short it, it will be on the EURUSD and long it on GBPUSD ( The opposite of what I did since the biginning of the month ).

EURUSD Daily 20-11-09

Price try absorbing the demand present at the 1.4845 level. We should see a break of this support next week I believe, and the no demand bar of wednesday tell me that smart money is more intrested on the downside than on the upside. If a break of 1.4845 occured we should go to 1.4680 pretty quickly.

As per my analysis of last week waiting for a break of the level before entering short is a good idea.

GBPUSD Daily 13-11-09

Monday was an up day, breaking the resistance at 1.6685, but take a look at the volume and the close. The Volume was very low, we have to go as far as one month ago the find a day with volume as low as that (12-10-09). Moreover the close was in the middle of the candle, those two indications alert us that professionals are not interested in higher prices.

Naturally, following days of the week dragged the price down to the trend line where a test occured. Again low volume, lower than the two days before : No supply. and price reversed on Friday with an up close. This test bar is very important, I am still bullish for the pair but if we break this candle from downside I would change my mind and expect prices to go down to 1.6300 area.

EURUSD Daily 13-11-09

This week tested the level of 1.5045 as expected in previous analysis. This test has been in relatively low volume compared to days before, it translate a lake of interest by smart money above this level and no break-out will succeed in those kind of conditions.

It is the reason why we saw the market falling on Thursday with good volume, professional traders are positionning themselves in the short side of the market and even if Friday was an up day I believe that we should see a kind of retracement near 1.4600-1.4500 at least in the following weeks. Waiting for a break of 1.4844 before could be a good idea as we saw some demand on Friday supporting this level but I believe the absorbtion is not far, and if not expect a trading range for some times between 1.4844 - 1.5045.

EURUSD Daily 06-11-09

Monday was a no demand bar : Up close, volume less than the two previous days, confirming my previous analysis of the 30-10-2009. But the candle of Tuesday was a really more interesting day and the most important of the week. You can see that volume was huge compared to all volume on the left and the candle is down, went behind the support line to finally close above it and in the upper half of the candle. How can the candle close like this if all the volume was selling ? Professional money was in fact buying during the day and it represents a key change of market sentiment. Moreover the next day is up, closing above the resistance line, so the high volume must have contained more buying than selling either for it to close on the highs, or for the next day to be up (sign of strength). I also call this kind of pattern a Spring.

Now, if you look at the candle of Friday you will see a down candle in volume particularly low, less than the two previous day, this is no supply. Market makers and professionals are not interested anymore to the down side, and a break of this candle from the upside will be a perfect entry for a long position.

We should see this break next week and a move up to the resistance at 1.5045 shortly after.

To conclude for this week you can see from my analysis of GBPUSD and EURUSD that my sentiment is really bearish for the US Dollar. Let’s see how it goes, and see you next week.

GBPUSD Daily 06-11-09

Cable moves of Monday and Tuesday were confirming the bullish background seen during the month of October.

On Monday, we saw a down close compared to the closed price of Friday in volume less than the two days before, this is no supply. Tuesday was a shake-out type day, It is engineered to create panic selling, thus helping the transfer of stock back to the professional traders. This not only catches stops, it is also designed to mislead as many traders as possible in a wrong position and shake the market out.

These 2 days were very good signs of strength into the previous volume absorbing supply candle area and the bullish volume of Thursday and Friday ( increasing volume on up bar ) comfort me in my analysis.

In my opinion, we should test 1,6685 resistance pretty soon next week and maybe start to go to the next resistance at 1,7028.

Article : by Todd Krueger II

Follow The Smart $$: Let Candles & Volume Guide The Way

Compared to the common bar chart, candlestick charts are visually more capable of revealing the psychology and sentiment behind a price movement. This occurs as a result of the techniques used to create the candlestick. Each candle clearly shows the relationship of the open versus the close price. For example, when the close is higher than the open, a hollow body is displayed (to make the charts easier to see, hollow candles are replaced by green bodied candles for this article), when the close is lower than the open, a filled in, or solid body is assigned (these will appear as red bodies in this article).

To show the overall range of the bar, the high and low are displayed with a line that emerges from the body of the candle, these are known as the upper and lower shadows. It is the interrelationship between the size and position of the body, large or small, and the size and position of the upper and lower shadows, long or short, that create various candle patterns. For this article, I focus on one popular pattern called the doji. But first, let’s talk about Western methodology.

WYCKOFF’S WORK

Nearly a century ago while Japanese candlestick charts remained a closely guarded secret in Asia, an American trader by the name of Richard D. Wyckoff began to publish his methods of detecting supply and demand imbalances in the market. In his 1909 book, Wall Street Ventures and Adventures through Forty Years, Wyckoff introduced his discovery that it was possible to measure the force of buying and selling pressures in any freely traded market.

Wyckoff’s research revealed that a trained chart reader could determine, with a high degree of accuracy, the cause behind price movement, whether it was to buy without moving the price up (accumulation), or to mark the price up/down or even to discourage buying or selling by the mass public (the herd).

A BIG FOOTPRINT

Wyckoff’s lifetime of research proved that future price moves were foreshadowed on the price chart because the “composite man” or “smart money” must leave its trading footprint on a price chart due to the sheer size of its trading volume. It is the supply and demand imbalances created by smart money that is the cause of price movement. Their activity is measured with four simple variables:

• Price movement (high, low and closing price).
• Trading volume.
• The relationship between price movement and volume.
• The time it takes for the price movement to run its course.

PUTTING IT TOGETHER

Imagine if you will that Wyckoff and the Japanese rice traders had lived in today’s society where global information is easily shared. By sharing his research with the rice traders, Wyckoff would have discovered that he was leaving out an important piece of the puzzle in his analysis: the relationship of the opening price to the closing price and its relationship to the overall trading range. Because he only looked at the high, low and close on a bar chart, his already good analysis could have been greatly improved by adapting his analysis to the candlestick chart. This enhanced view of the market would have further identified and refined the true sentiment and psychology of the smart money, which Wyckoff was measuring.

Also, imagine the true amazement that the rice traders would have experienced when they learned how to apply Wyckoff‘s volume analysis techniques that identify supply and demand imbalances from the smart money. It is debatable whether these early rice traders even incorporated volume into their candlestick analysis, but even if they had, it would not have been as accurate or revealing as the techniques applied by Wyckoff in his analysis of the price and volume relationship.

When these two East and West methodologies are combined, a powerful synergy is formed. Each methodology contributes precisely what the other lacks. This new combined methodology is known as Wyckoff candle volume analysis (WCVA).

VOLUME AND CANDLES IN ACTION

For this article, I apply WCVA on a one-bar reversal pattern known as the doji. This is a candlestick pattern that occurs when the opening and closing prices are the same or very close to each other. The shadows can be either long or short, and there can be various types of doji bars. But for the following examples it is not important to distinguish the type of formation, it is only important to be able to recognize what it looks like on a chart (see Figure 1).

This formation is said to represent market indecision because the market opens, trades throughout the charted period, then closes at or near the opening price. It represents a battle between bulls and bears that neither won. It is widely believed that it represents a better reversal pattern at the top of the market than at the bottom, although you will learn that this is not correct under the proper circumstances. By applying WCVA, you will learn how to distinguish when there is no indecision in a doji formation.

At the bottom of a market, a Wyckoff technician is looking for tests of supply in the market. A test occurs when the price is marked down to see if greater volume comes in at the lower price. If it does, this signifies supply is in the market. This supply must be removed before the market can begin any substantial up move. However, if the market is marked down and no sellers emerge at these lower prices, the price will come back up to close off the low, volume is lower relative to the prior candles. With no supply present at the current price level, the price should rise.

The “doji test” bar must exhibit the following parameters to be valid:

1. It must have a low that is lower than the previous candle’s low.

2. It has to display lower volume than at least several of the prior candles. The lower the volume, the stronger the indication of no supply being present.

Let’s take a look at the first of two examples that are defined as “doji test” bars. Figure 1 is a 15-minute chart of the E-mini S&P. Notice the nice downtrend in the near background. Looking left on the chart, five candles prior to the highlighted doji, the high was 1,234.25. Then the market dropped 17.25 points in 75 minutes to the low on the doji of 1,217. This sets up the ideal conditions for this formation to occur. Remember what I wrote earlier, the test candle makes a new recent low, and if there is reduced volume, it shows that no supply is present.

FEW INTERESTED SELLERS

You can see that this doji is making a new low on the chart, and the volume is lower than all of the previous candles. By standard candlestick analysis measures, one would come to the conclusion that this bar represents indecision on the part of the market participants. However, when viewed from a WCVA perspective, it is clear that no indecision exists here. The chart shows that there are few interested sellers at this lower price and the price comes back to close near the open. Within the next four hours of trading this market jumped more than 25 points.

With this formation, it is important to understand that the smart money, which represents a large percentage of the overall trading volume, is not selling as lower price levels are explored. This is clearly evident and is shown by the reduction in total volume. If the smart money is not selling, retail traders need to be aware of this. This will prevent them from selling at market bottoms and allow them the opportunity to establish a long trade into the path of least resistance.

Figure 2 shows a daily chart of Ryder stock. Again, in the near background is a nice downtrend. Because of the size of the chart, it may be hard to see the price scale, but just 10 candles prior to the highlighted candle, the high price was $61.19 per share. The low of this doji test was $54.95, which represents more than a 10 percent drop in the value of the stock in just 10 trading days. Once again, notice how the volume gets lower as the doji candle tests for supply but does not find an increase in interested sellers at these lower price levels.

If there are no sellers, the price should increase. The price of this stock rose nearly 19 percent in the next nine trading days, as there were no sellers present to stop it from increasing in value. In fact, you can see from the gap-up opening the next day at $57 that the specialists marked the stock up as there were no sellers of size on their books. The price closed on the very high of the day at $59.08 demonstrating the built-in demand that this WCVA formation represents.

WANING DEMAND AT TOPS

Now let’s look at a doji at the top of a market. This formation is called “doji demand drying up.” At the top of a market, a Wyckoff technician is looking for signs that demand is waning. A lack of demand occurs when the price is marked up to see if there are willing buyers at these higher price levels, but as the price moves up, trading volume decreases. This is a telling sign that there is no interest in higher prices from the smart money.

With no professional buying interest at the current price level, the price should fall. The “doji demand drying up” must exhibit the following parameters to be valid:

1. This candle’s close must be higher than the previous candle’s close.

2. It has to display lower volume than at least several of the prior candles. The lower the volume, the stronger the indication that demand has dried up.

Figure 3 is a daily chart of the big S&P contract. Preceding the doji marked on the chart, you can see that the market has been in an uptrend for the past 23 trading days. As the market moves up to the highest reached in the last month and a half, the amount of interested buyers is drying up. We know this because the volume is reduced relative to the previous candles, even though the S&P is making a new recent high—strong markets don’t behave this way.

This occurs at the top of the market, and when we apply WCVA, the “doji demand drying up” indicates that at least this phase of the up move is either close to or at the end.

The close of the doji candle occurred at 1,425.8. Only five trading days later, the market closed at 1,373.4, a drop of more than 50 points. With this formation, it is important to understand that the smart money is not interested in supporting higher prices. This is evidenced by the reduction in overall volume. If the smart money is not interested in higher prices; retail traders can take this knowledge and refrain from buying at market tops, as well as allow them to establish a short trade into the path of least resistance.

FOLLOW THE SMART MONEY

By understanding these straightforward examples, you should now be capable of identifying these formations when they occur on your charts at home. I only had the space to review one candle formation in this article, but the analysis applies to every type of candle pattern.

Wyckoff candle volume analysis works in all markets and timeframes, and precisely reveals the true psychology and sentiment of the smart money. By trading in harmony with the smart money, we truly trade in the path of least resistance and increase the probabilities of success. This knowledge will empower the individual trader and help prevent buying market tops and selling market bottoms for all who apply these techniques.

Todd Krueger is a professional trader, creator of Wyckoff Candle Volume Analysis and is the founding president of Traders Code LLC, which provides trading tools and education for traders at all levels of expertise. For more information, please visit TradersCode.com. Reach Krueger at todd@traderscode.com.

Article : by Todd Krueger

Rediscover the Lost Art of Chart Reading: Using Volume Spread Analysis
by: Todd Krueger

Most traders are aware of the two widely known approaches used to analyze a market, fundamental analysis and technical analysis. Many different methods can be used in each approach, but generally speaking fundamental analysis is concerned with the question of why something in the market will happen, and technical analysis attempts to answer the question of when something will happen.

There is, however, a third approach to analyzing a market. It combines the best of both fundamental and technical analysis into a singular approach that answers both questions of “why” and “when” simultaneously; this methodology is called volume spread analysis. The focus of this article is to introduce this methodology to the trading community, to outline its history, to define the markets and timeframes it works in, and to describe why it works so well.

What is Volume Spread Analysis?

Volume spread analysis (VSA) seeks to establish the cause of price movements. The “cause” is quite simply the imbalance between supply and demand in the market, which is created by the activity of professional operators (smart money). Who are these professional operators? In any business where there is money involved and profits to make, there are professionals. There are professional car dealers, diamond merchants and art dealers as well as many others in unrelated industries. All of these professionals have one thing in mind; they need to make a profit from a price difference to stay in business. The financial markets are no different. Doctors are collectively known as professionals, but they specialize in certain areas of medicine; the financial markets have professionals that specialize in certain instruments as well: stocks, grains, forex, etc.

The activity of these professional operators, and more important, their true intentions, are clearly shown on a price chart if the trader knows how to read them. VSA looks at the interrelationship between three variables on the chart in order to determine the balance of supply and demand as well as the probable near term direction of the market. These variables are the amount of volume on a price bar, the price spread or range of that bar (do not confuse this with the bid/ask spread), and the closing price on the spread of that bar (see Figure 1).

With these three pieces of information a properly trained trader will clearly see if the market is in one of four market phases: accumulation (think of it as professional buying at wholesale prices), mark-up, distribution (professional selling at retail prices) or mark-down. The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of chart analysis. To interpret a price chart without volume is similar to buying an automobile without a gasoline tank. For the correct analysis of volume, one needs to realize that the recorded volume information contains only half of the meaning required to arrive at a correct analysis. The other half of the meaning is found in the price spread (range).

Volume always indicates the amount of activity going on, and the corresponding price spread shows the price movement on that volume. Some technical indicators attempt to combine volume and price movements together, but this approach has its limitations; at times the market will go up on high volume, but it can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So there are obviously other factors at work on a price chart. One is the law of supply and demand. This is what VSA identifies so clearly on a chart: An imbalance of supply and the market has to fall; an imbalance of demand and the market has to rise.

A Long and Proven Pedigree

VSA is the improvement upon the original teaching of Richard D. Wyckoff, who started as a stock runner at the age of 15 in 1888. By 1911, Wyckoff was publishing his weekly forecasts, and at the height of his popularity, it was rumored that he had over 200,000 subscribers. In 1931 he published his correspondence course, which is still available today. In fact, the Wyckoff method is offered as part of the graduate level curriculum at the Golden Gate University in San Francisco. Wyckoff is said to have disagreed with market analysts who traded from chart formations that would signal whether to buy or sell. He estimated that mechanical or mathematical analysis techniques had no chance of competing with good training and practiced judgment.

Tom Williams, a former syndicate trader (professional operator in the stock market) for 15 years in the 1960s-1970s, enhanced the work started by Wyckoff. Williams further developed the importance of the price spread and its relationship to both the volume and the close. Williams was in a unique situation that allowed him to develop his methodology. He was able to monitor the effects of the syndicate’s trading activity on the price chart. As a result, he was able to discern which resulting price gyrations derived from the syndicate’s action on the various stocks they were buying and selling. In 1993, Williams made his work available to the public when he published his methodology in a book titled Master the Markets.

A Universal Approach

Just as Wyckoff’s approach was universal in its application to all markets, the same is true of VSA. It works in all markets and in all timeframes, as long as the trader can get a volume histogram on the chart. In some markets this will be actual traded volume, as it is with individual stocks, yet in other markets the trader will need access to tick-based volume, as is the case with forex. Because the forex market does not trade from a centralized exchange, true traded volume figures are not available, but this does not mean that the trader cannot analyze volume in the forex market, it simply requires that tick-based volume be used instead.

Think of volume as the amount of activity on each individual bar. If there is a lot of activity on that price bar, then the trader objectively knows that the professional operator is heavily involved; if there is little activity then the professional is withdrawing from the move. Each scenario can have implications to the supply/demand balance on the chart and can help the trader determine the direction the market is likely to move in the short to medium term. A forex example will be shown later in this article. Just as VSA is a universal approach to all markets, this methodology works equally well in all time frames. It makes no difference if the trader is looking at a 3-minute chart, or if daily or weekly charts are being analyzed—the principles involved remain the same. Obviously, if supply is present on a 3-minute chart, the resulting downward move will be of a lesser magnitude than supply showing itself on a weekly chart, but the result of excess supply on a chart is the same in both instances; if there is too much supply, then the market must fall.

Why it Works

Every market moves on supply and demand: Supply from professional operators and demand from professional operators. If there is more buying than selling then the market will move up. If there is more selling than buying, the market will move down. Before anyone gets the impression that the markets are this easy to read, however, there is much more going on in the background than this simple logic. This is the important part of which most non-professional traders are unaware! The underlying principle stated above is correct; however, supply and demand actually work in the markets quite differently. For a market to trend up, there must be more buying than selling, but the buying is not the most important part of the equation as the price rises. For a true uptrend to take place, there has to be an absence of major selling (supply) hitting the market. Since there is no substantial selling to stop the up move, the market can continue up.

What most traders are completely unaware of is that the substantial buying has already taken place at lower levels as part of the accumulation phase. And the substantial buying from the professional operators actually appears on the chart as a down bar/s with a volume spike. VSA teaches that strength in a market is shown on down bars and weakness is shown on up bars. This is the opposite of what most traders think they know as the truth of the market. For a true downtrend to occur, there must be a lack of substantial buying (demand) to support the price. The only traders that can provide this level of buying are the professional operators, but they have sold at higher price levels earlier on the chart during the distribution phase of the market. The professional selling is shown on the price chart during an up bar/s with a volume spike, weakness appears on up bars. Since there is now very little buying occurring, the market continues to fall until the mark down phase is over. The professional operator buys into the selling that is almost always created by the release of bad news; this bad news will encourage the mass public (herd) to sell (almost always for a loss). This professional buying happens on down bars. This activity has been going on for well over 100 years, yet most retail traders have remained uninformed about it—until now.

VSA at Work

Let’s now look at a clear example of supply entering a market as the professional operators are selling into a rising market. Please see Figure 2 as we look at the U.S. dollar/Swiss franc spot forex market on a 30-minute price chart. This market was in the mark-up phase until the bar labeled 1; notice the massive volume spike as an ultra wide spread, up bar, appears with the price closing in the middle of the bar. This is a telltale sign of professional selling entering the market; a trader must look at this bar and realize that if all the activity shown on the volume histogram represented buying, we could not possibly have the price close on the middle of the bar. Because professional operators trade with very large size, they have to sell into up bars when the herd is buying; this is how they unload their large size onto the unsuspecting public. Many times, these types of bars are created from news reports that appear very bullish to retail traders and invite their participation on the long side of the market. When this occurs, it creates the opportunity for professional operators to systematically sell their holdings and short the market, without driving the price down against their own selling.

A properly trained trader understands instantly that when the bar closes in the middle like this, with massive volume, it signifies a transfer of ownership from the professionals to what VSA refers to as “weak holders,” traders that will soon be on the wrong side of the trade. Think of the analogy used earlier in this article; this is the professional operators “selling at retail” (distribution) when earlier they established their positions by “buying at wholesale” (accumulation). On the bar labeled 2, again we have more selling from the professionals as they complete the transfer of ownership to weak hands. The trained trader can see this as the bar labeled 3 is now closing lower, confirming that there was a large block of selling on the previous bar.

Don’t Be Part of the Herd

Let’s review what just happened on the price chart here. The professional money has sold their holdings to the mass public called the “herd” or “weak holders.” The professionals sold short and the new buyers are locked into a poor position. How can price continue higher when the professional money won’t support higher prices and there are no other buyers left to buy? With no buyers left to support the price, the price falls as the chart continues on into the mark down process (see Figure 3). To explain why prices fall in any market, let’s refer to a previous statement: “For a true downtrend to occur, there must be a lack of substantial buying (demand) to support the price. The only traders that can provide this level of buying are the professional operators, but they have sold at higher price levels earlier on the chart, during the distribution phase of the market.”

When the price falls far enough, the professional operator will now enter the market and buy (at wholesale levels) from the “weak holders,” who are forced to sell at a substantial loss, and the cycle will repeat itself over and over again. This is the way all markets work! Because professional operators specialize in many different markets and many different time frames, this same sequence of events unfold on price charts of all durations. We reviewed a 30-minute chart in this article, but it could just as easily have been a weekly chart. The market we looked at was forex, but volume spread analysis works just as well in stocks, futures and commodities. VSA is a market analysis methodology that alerts the trader to the two most important questions that they must know the answers to in order to trade successfully — why and when. Why markets move is based on the supply and demand from professional operators, and when they move can be expanded upon once the trader has a more thorough understanding of volume spread analysis.

GBPUSD Daily 30-10-09

First of all we were in a down trend at the beginning of the month until the 12-10 where we saw a Spring : Price came down to the support line in very low volume ( no Supply ) and, the very next day, price came even lower during the trading session to finally reverse to close up above the high of the 12-10. This was a good sign of strengh confirmed on the 15-10 with a volume absorbing supply bar.

On contact with the resistance at 1.6685 we saw lot of supply on the 23-10 with a big sell-off of nearly 400 pips. But this move was not confirm the next day which closed up on medium volume which make me think that probably there was professional buying during the 23-10.

I think we should test again the level at 1.6685 next week, and probably 1.7028 later.

So long bias next month for GBPUSD.

EURUSD Daily 30-10-09

EURUSD was in an up trend during this month until the 26-10 were a big reversal occured, confirmed by a down close the next day. This translate a change in supply/demand dynamics and price continued to move even lower, behind the support line at 1.4844.

We saw an attempt on thursday to move up, but in volume less than the 2 day before ( no demand ), price was unable to close above the resistance at 1.4844 so this is the reason why I have a short bias for the pair and I think we should test the support at 1.4480 shortly.

But we have to keep in mind that the overall trend is up on this chart so probably not a good idea in terms of risk reward to take a short. But for sure I will not take a long behind 1.4844 !