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Old 07-05-2009, 12:49 PM   #1

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The Price / Volume Relationship

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
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Old 07-05-2009, 12:50 PM   #2

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Re: The Price / Volume Relationship

(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 ...

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Old 07-05-2009, 12:52 PM   #3

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Re: The Price / Volume Relationship

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 ...

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Old 07-05-2009, 12:55 PM   #4

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Re: The Price / Volume Relationship

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 ...

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Old 07-05-2009, 12:56 PM   #5

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Re: The Price / Volume Relationship

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 ...

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Old 07-05-2009, 12:57 PM   #6

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Re: The Price / Volume Relationship

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 ...

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Old 07-05-2009, 12:58 PM   #7

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Re: The Price / Volume Relationship

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 ...

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Old 07-05-2009, 12:59 PM   #8

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Re: The Price / Volume Relationship

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.

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