Page 20 - A Complete Guide to Volume Price Analysis: Read the book then read the market

In a manipulated market, volume reveals the truth behind the price action. In a pure market, volume reveals the truth behind market sentiment and
order flow.

So, let's take a closer look at price, and in particular the effect that changes in technology have had on the four principle elements of a price bar, the
open, the high, the low and the close. And the most significant change in the last few years has been the move to electronic trading, which has had
the most profound effect on two elements of the four, namely the opening and closing prices.

Scroll back to the days of Ney and earlier, and the markets in those days only traded during a physical session. The market would open when the
exchange opened, and close when the exchange closed at a prescribed time. Trading was executed on the floor of the exchange, and everyone
knew when the market was about to open or close. This gave the opening and closing prices great significance, particularly on the open and close
of the day. The opening price would be eagerly awaited by traders and investors and, as the closing bell approached, frenetic trading activity would
be taking place as traders closed out their end of day positions. This is now generally referred to as regular trading hours (RTH), and is the time the
exchange is physically open. Whilst this principle still applies to stock markets around the world, with the NYSE trading from 9.30am to 4.00pm, and
the LSE open from 8.00 am until 4.30 pm, what has revolutionised the trading world is the advent of electronic trading.

The platform that really changed the game was Globex, introduced by the CME in 1992, since when virtually every futures contract can now be
traded 24 hours a day. Whilst the cash markets, such as stocks, are restricted to the physical time set by the exchange, what has changed, certainly
with regard to this market, has been the introduction of electronic index futures, which now trade around the clock. What this means, in effect, is that
the opening and closing prices of the cash market are now far less important than they once were.

The reason is simply the introduction of Globex, as electronic trading has become the standard for index futures, which are derivatives of the cash
market indices. The ES E-mini (S&P 500) was the first to be introduced in 1997, followed shortly afterwards by the NQ E-mini (Nasdaq 100) in
1999, and the YM E-mini (Dow Jones 30) in 2002. With these index futures now trading overnight through the Far East and Asian session, the open
of the cash index is no longer a surprise with the futures signalling overnight market sentiment well in advance. By contrast, in the days before the
advent of electronic trading, a gapped open, up or down, would have given traders a very strong signal of market intent. Whereas today, the open
for the major indices is no longer a great surprise as it is forecast by the overnight futures markets.
Whilst it is certainly true to say that individual stocks may well react for a variety of reasons to sentiment in the broad index, generally all boats tend
to rise on a rising tide, and therefore likely to follow suit. The open and the close for individual stocks is still significant, but the point is that the index
which reflects market sentiment will be broadly known in advance, making the open less relevant than it once was.

The same could be said of the closing price. When the physical exchange closes, stocks are closed for the day in the cash markets, but electronic
trading continues on the index future and moves on into the Far East session and beyond.

This facet of electronic trading also applies to all commodities, which are now traded virtually 24 hours a day on the Globex platform, and both
currency futures, and currency spot markets also trade 24 hours a day.

The electronic nature of trading is reflected in the price chart. Twenty years ago, gap up or gap down price action would have been the norm, with
the open of a subsequent bar closing well above or below the close of the previous bar. These were often excellent signals of a break out in the
instrument, particularly where this was confirmed with volume. Such price action is now rare, and generally restricted to the equity markets, which
then catch up when the physical exchange opens the next day. Virtually every other market is now electronic such as the spot forex market, and as
we have just seen, indices catch up with the overnight futures as do commodities and other futures contracts.

The open of one bar will generally be at exactly the same price as the close of the previous bar, which reveals little. This is one of the many effects
that electronic trading is now having on price action on the charts, and is likely to continue to have in the future. Electronic trading is here to stay,
and the significance of these elements of price action in various markets will change as a result.

If the market is running 24 hours a day, then the open of one bar will simply follow the close of the previous bar, until the market closes for the
weekend. From a price action trading perspective, this gives us little in the way of any valid 'sentiment' signals, which makes volume even more
relevant in today's electronic world – in my humble opinion at any rate!

However, let's take a look at an individual bar in more detail, and the four elements which create it, namely the open, the high, the low and the close,
and the importance of these from a Volume Price Analysis perspective. At this point I would like to say that the only price bars I use in the
remainder of this book, and in my own trading are candlesticks. This is what Albert taught all those years ago, and it is how I learnt.

I have tried bar charts and thought I could dispense with candles. However, I have returned to candles and do not plan to use any other system, for
the foreseeable future. I do understand that some traders prefer to use bars, line charts, Heikin Ashi, and many other. However, my apprenticeship
in Volume Price Analysis was with candlesticks and I believe its true power is revealed when using this approach. I hope, by the end of this book
you too will agree.

Therefore, I want to start by dissecting a typical candle and explain how much we can learn from it. In any candle, there are seven key elements. The
open, high, low and close, the upper and lower wicks and the spread as shown in Fig 3.10. Whilst each of these plays a part in defining the price
action within the time frame under consideration, it is the wicks and the spread which are the most revwevthe mosealing in terms of market
sentiment, when validated with volume.