Volume Analysis Patterns

Volume is one of the tools professional traders use to find clues about possible market movement as well as confirmations to trends.Volume data is most accurate in stock, future, and commodity exchanges. This is due to the fact that all of these are regulated exchanges. While most of the trading that happens on these exchanges is electronic nowadays, every order still has to be cleared with the exchange in the end, so no matter how large or small the quantity traded is, it is registered in the database.

In Forex trading things are different. Volume data is measured by how many ticks are registered in time frame chosen in the chart. For those who don’t know what a tick is, it is a transaction (filled order) made in the underlying instrument regardless of the quantity traded. A tick charts draws bars based on the predefined number of trades conducted (if you have a 50-tick chart then each bar is closed at the end of the 50th trade, regardless of how much time it takes to conduct these trades. This means a transaction of 1 mini lot is a tick and a transaction of 10 standard lots (buying or selling 10 lots together as 1 single order) is also a tick.

With the absence of a single exchange that processes all orders in Forex, each broker calculates volume based on their own ticks taken from there trades database.

The bottom line is, the following patterns are best applied to stock and future contracts and not of much value in the Foreign Exchange trading.

To produce meaningful signals, volume is coupled with price data in these patterns.

Accumulation

Accumulation, which indicates that buyers are loading up on a certain stock or a futures contract, is signaled by a slowing in the downtrend (or price going nowhere) while the volume stays high.

Distribution

The opposite of accumulation is indicated by a slowing in the uptrend (or price going nowhere), while volume stays high. Which means that sellers are starting to takeover in the underlying market.

Confirmation of Trend

For a trend to be healthy whether it is an uptrend or a downtrend, volume has to be increasing in each up or down swing. The volume data acts as a confirmation of the trend in this case. A decreasing volume means that the trend is nearing its end or at least about to stall.

Volume Spikes

Sometimes volume spikes, accompanied with other reversal signals with gaps or candlestick patterns, signal the end of a decent run in price. This can be very aggressive and needs extra precaution.

Breakout Signals

To gauge the interest and therefore determine the probable direction of the breakout of a trading range, determine the trading range that you want to monitor, then watch the overall volume in the duration of the trading range. 

Generally speaking, higher volume leading to the breakout (whether up or down), gives more value to the breakout. There is also the follow-through volume, which is high volume after the breakout has occurred. This also adds to the strength of the breakout.

Notes of Precaution

• Volume is relative so when dealing with volume bars I found the best way to put things in context is drawing trend lines across volume bars. This helps understanding the story that volume tells.
• Volume signals aren’t enough by themselves, instead they act to confirm your other signals or refute them. Don’t rely on volume alone to produce signals.

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Butterfly and Bat Chart Patterns

Butterfly and Bat Chart Patterns

Chart patterns are among the most important tools we can use to predict the market direction, take a position and make some money. So far, I have talked about triangles, wedges, flags, pennants, rectangles, head and shoulders, and cup and handle patterns. In this article, I am talking about some other kinds of patterns that are very important in predicting the market direction, specially when there is a possibility that the market changes its direction.

Butterfly which is also known as W, is an important reversal pattern that usually forms at the top of an uptrend. Of course, you have to notice that this pattern doesn’t always cause the market to reverse, and sometimes the trend will be continued after that. I will tell you what to do to stay away from taking wrong positions.

Bat pattern is so similar to butterfly pattern. It is a reversal pattern too. In fact butterfly and bat patterns are almost the same, but just their shape is a little different. Sometimes it becomes hard to say if the pattern is a bat or butterfly pattern, but this doesn’t matter at all. The only thing we have to learn very well is that we understand that the market is going to an indecision status for a while and it is possible that it reverses, so that we take a position and make some money.

Experience shows that bat pattern usually forms at the bottom of downtrends, but butterfly patterns form at the top of uptrend. Bat patterns look like capital M, whereas butterfly patterns look like capital W.

Please let me show you some examples and then I will tell you how you can trade using these patterns.

This is a beautiful butterfly pattern formed at the top of a strong uptrend on GBP/USD daily chart:

 And this is another butterfly pattern on the same chart:

 And this is another butterfly pattern formed on EUR/USD four hours chart:

 This is a bat pattern formed at the bottom of a downtrend on EUR/USD four hours chart. As you see it really looks like a bat and also capital M. Also you can see that the downtrend reverses and goes up very strongly after this bat pattern:

 How to Trade Using the Butterfly or Bat Patterns?

Like all the other patterns, this pattern also has a support and resistance line. My strategy for trading this pattern is the same as my trading strategy with the other patterns. I consider the rules, but I always wait for breakouts. This is what I have always emphasized on.

For example, although it is said that butterfly and bat patterns are reversal patterns, I do not go against the trend when I see that these patterns are formed at the top of an uptrend. I wait for the market to break below the support line and then I go short.

Here below I am showing you an example. As you see a strong butterfly pattern is formed on EUR/USD four hours chart, and finally it worked strongly as a reversal pattern and the price went down. However, in order to go short, we had to wait for the market to go down and break below the butterfly support. The breakout occurs when a candlestick closes below the support line or above the resistance. The stop loss has to be placed above the candle which has broken below the support:

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World Stock Exchanges Comparing

Largest World Stock Exchanges Comparing

 The Oldest Exchange: Of the top 20 stock exchanges on the above list, the oldest can be found in Frankfurt. Originally the location of medieval trade fairs in the 11th century, Frankfurt quickly became an important center for commercial and monetary transactions. The “birth” of the stock exchange is said to have happened in 1585 when fair merchants decided to establish fixed currency exchange rates.

The Most Listed Companies: Established in 1875, the Bombay Stock Exchange was actually Asia’s first stock exchange. It has 5,749 listed public companies, which is the most of any of the top 20 exchanges. The majority of companies listed on the BSE are small caps, with an average market capitalization of just US$292 million per company.

The Largest Market Cap: As mentioned before, the NYSE takes the cake here with close to $20 trillion in market capitalization. There is a steep drop-off after the NYSE, which is followed by NASDAQ ($7 trillion), London Stock Exchange ($6 trillion), Tokyo Stock Exchange ($4 trillion), Shanghai Stock Exchange ($4 trillion), and Hong Kong Stock Exchange ($3 trillion).

In fact, only 16 exchanges have market capitalizations over $1 trillion. Here are those visualized by market cap on a map from our previous infographic that showed all of the stock exchanges in the world.

 

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