Welcome to one of the most important and most exciting articles in advanced options trading. As we had discussed in our last article about the implied volatility percentile. Now, we are going to learn about the price-volume action. As we know that Bhav Bhagwan Che means the price is a God. The price-volume actions tell you about the movement of the market.
So, in this article, we are going to discuss one of the very popular and powerful indicators which are called price volume action. Price and volumes are counterweights and sometimes they work differently and sometimes when they work together, they changed the market dynamics.
In trading, the term volume tells us the number of units that change hands for stocks or futures contracts over a given and fixed period. Traders depend on it as a key term because it lets them understand the liquidity level of an underlying asset, and how easily they can obtain into or out of a position close to the current price, which can be a moving target.
Volume analysis is a technique used to find out the trades you will make by finding the relationships between volume and prices. The two key ideas behind the volume analysis are buying volume and selling volume.
When the volume which is trading is higher, you'll have an easier time buying and selling large or small quantities of underlying asset or stocks, because other traders are in the stock market, stand by to fulfill the other side of your trade.
Each position must have a buyer and a seller. For example, to buy an underlying asset or stock, a seller must sell to you, and for you to sell, a buyer must buy from you. Sellers have more control when the price goes down. Sell volume takes place at the bid price. The bid tells us the highest price buyers will offer. If someone desire to sell at the bid price, it represents that the seller doesn't want the stock. This tells us an example of selling volume.
An increasing volume tells us the conviction of buyers and sellers in either moving the price up or down, respectively. For example, if the stock trend goes up and volume increases as the price move higher, it represents the buyer's need to buy; this particularly happens with larger moves to the upside which is a positive return.
A trend can carry on decreasing volume for long periods, but particularly decreasing volume as the price trends shows the trend is weakening. For example, if the trend goes up but the volume is slowly decreasing, it represents fewer people who want to buy and keep pushing the price up. That said, the trend will not reverse until more large-scale selling volume than buying volume takes place.
Now, let’s discuss the price action. Price action denotes the characteristics of a stock’s price movements. This movement is very much often analyzed for price changes in the recent past. In simple terms, a price action is a trading tool that helps a trader to read the market and make correct trading decisions based on the recent and actual price movements, rather than relying only on technical indicators.
Since it does not take the consideration of the fundamental analysis factors much and focuses more on recent and past price movement, the price action options trading strategy is dependent on technical analysis tools.
Now, few tools can be used in Price action. Candlestick’s approach is the graphical representations on a chart that show the trend, open, close, high, and low price of an underlying asset or stock. Traders use candlesticks pattern in various strategies. They use this in the price volume action trading. Generally, they go with the trend.
An underlying asset or the stock can be trading throughout the day with prices continuing to up and down. Traders indicate these fluctuations in the market as bullish trends, where the price is going up, or a bearish trend, where the price is going down.
Related to all the above, most of the traders use price support and price resistance area to give good trading opportunities. Support and resistance areas happen where the price has tended to change in the past. Such levels may become relevant again in the future.
One thing you remind that price action trading is closely held by technical analysis tools, but the last trading call is dependent on the trader’s perspective, which offers the advantage instead of imposing a strict set of rules to be followed.
Most traders believe that the market movement is generated by a random pattern and there is no clear systematic way to define a strategy that will always work. By adding the technical analysis tools with the recent price history to know trade opportunities based on the trader’s explanation, price action trading has a lot of support in the trading world.
Now, what are the advantages of price volume action? So, advantages involve the self-defined strategies that give flexibility to traders, applicable to multiple techniques, simple use with any trading software, applications, and trading platforms, and the probability of easy back testing of any unknown strategy on past data. Most importantly, the trader’s sense in charge, as the strategy gives them to decide on their actions, instead of only following a set of rules.
So, in conclusion, I would like to tell you that all new traders can welfare from learning price action volume trading. Learning to read and explain price action movements becomes a trading system on its own. It can help if you determine to implement other analysis tools such as fundamental and technical.
If you are studying to trade, you only need to learn one method to start with. Become profitable with your select strategy before trying to learn more. Price volume action trading doesn't guarantee profits, but it makes a very good trading style with time and practice.