Page 19 - A Complete Guide to Volume Price Analysis: Read the book then read the market

the price of one here! Now that's what I call value for money!!

However, I digress. Living close to London as I do, and just a stone's throw away from The President, is the old LIFFE building, the London
International Financial Futures and Options Exchange. As a frequent visitor to this part of London, I would often drive past this exchange, and at any
time during the day, would see the traders in their different brightly coloured jackets, dashing out to grab coffees and sandwiches before rushing
back to the floor of the exchange. Without exception these were generally young men, loud and brash, and in fact on the corner of Walbrook and
Cannon Street there now stands a bronze statue of a floor trader, mobile phone in hand. These were the days of fast cars, and aggressive trading,
and it was ironic that this was the world where I started my own trading career, with FTSE 100 futures orders filled on the floor of the exchange.

This was the world of adrenaline pumped traders, yelling and screaming using unintelligible hand signals, buying and selling in a frenetic
atmosphere of noise and sweat. It was positively primordial where the overriding emotion emanating from the floor was fear, and obvious to anyone
who cared to view it from the public gallery.

However, the advent of electronic trading changed all of this, and the LIFFE exchange was one of many casualties. All the traders left trading and
moved away from the pit, and onto electronic platforms. The irony is, that most of the traders, and I have spoken to many over the years, failed to
make the transition from pit trading, to electronic trading, for one very simple reason.

A pit trader, could sense not only the fear and greed, but also judge the flow of the market from the buying and sellngeing anding in the pit. In other
words, to a pit trader, this was volume or order flow. This is what a pit trader saw and sensed every day of the week, the flow of money, the weight
of market sentiment, and the trading opportunities that followed as a result. In other words, they could 'see' the volume, they could see when the big
buyers were coming into the market and ride on their coat tails. This is the equivalent of volume on the screen.

However, without being able to see, judge, and feel the flow in the pit, most of these traders failed to make a successful transition to screen trading.
Some succeeded, but most were never able to make that move, from an environment where price action was supported by something tangible.
Whether they would call it activity, order flow, sentiment, or just the 'smell of the market' this is what brought the price action to life for them, and why
they struggled to succeed with the advent of the electronic era.

Pit trading still continues today, and if you do get the chance to view it in action, I would urge you to go. Once you have seen it for real, you will
understand why volume is so powerful in supporting price, and why I believe the exponents of PAT are simply promulgating something different for
the sake of it.

Whilst it is undoubtedly true to say that price action encapsulates all the news, views and decisions from traders and investors around the world,
and that with detailed analysis we can arrive at a conclusion of future market direction, without volume we have no way of validating that price
analysis. Volume gives us our bearings, it allows us to triangulate the price action and to check the validity of our analysis. This is what the pit
traders of old were doing – they would see a price move, validate it by considering the order flow in the pit, and act accordingly. For us, it is the
same. We simply use an electronic version of order flow which is the volume on our screens.

But, let me give you another example.

Returning to our auction again, only this time there is no physical sale room. Instead we are joining an online auction, and perhaps now you can
begin to imagine the problems that the ex pit traders encountered. We have moved from the physical sale room, where we can see all the buyers,
the number of people in the room, the phone bids and the speed of the bidding. In a physical sale room we also get a sense of where the price
starts to pause. We see bidders become fearful as the price approaches their limit and they hesitate with the next bid, just fractionally, but enough
to tell you they are near their limit. This is what the pit traders missed.

In an online auction we are logged in and waiting for the auction to start. An item we want to buy appears and we start bidding. We have no idea
how many other bidders are there, we have no idea if we are playing on a level playing field. All we see is the price being quoted. The auctioneer,
for all we know, could be taking bids 'off the wall' (fake bids in other words) which happens more often than many people think. The reason is that all
good auctioneers like to encourage auction fever – it’s good for business, so they use every trick in the book.

Meanwhile back to our online auction. We continue bidding and eventually win the item.

But, have we got our item at a good price? And, in this scenario we are only referring to price and not value, which is a very different concept.
Besides, I hope by now, you are beginning to get the picture. In the online auction all we see is price.

Therefore, in a real online ‘auction’ of trading, do we really want to base our tradi bese our ng decisions solely on price? Furthermore, the great
iconic traders of the past would have given us their answer, and it would have been a very emphatic NO.

Once again I accept it is an imperfect example, but one which I hope makes the point.

To me, a price chart with no volume is only part of the story. Price does encapsulate market sentiment at a given and precise moment in time, but
with so much market manipulation prevalent in so many markets, why ignore such a valuable tool which is generally provided free.

Whilst price is a leading indicator, in itself, it only reveals what has gone before, from which we then interpret what is likely to happen next. Whilst we
may be correct in our analysis, it is volume which can complete the picture.