Page 40 - A Complete Guide to Volume Price Analysis: Read the book then read the market

of cause and effect.

In the following chapters, I would now like to build on these first principles and extend them out into actual examples, using real charts from a variety
of markets.

Chapter Five

Volume Price Analysis: Building The Picture

Mistakes are the best teachers. One does not learn from success.
Mohnish Pabrai ( 1964 -)

In the previous chapter we looked at some of the basic building blocks of VPA, and how to apply our analysis first to single candles, and then to use
this knowledge in relation to small groups of candles. This really took us through the first two steps of VPA in our three step process. The three step
process which begins with a close up look at one candle, then gradually zooms out, to step 2 which is the candles in close proximity to the latest
candle. Finally, we zoom out to bring the complete chart into focus, which is what we are going to focus on in this chapter, and in doing so, I hope
will also help to reinforce the basic skills we learnt in the previous chapter.

In addition in this chapter, I'm also going to introduce some new concepts which I hope will help to put everything into context, and pull the various
strands of VPA together. I think this is probably the best place to start, and then we can begin to look at a variety of examples, and I can walk you
through each chart as the price action unfolds.

So let me start with five concepts which lie at the heart of VPA, ty and these are as follows:

1. Accumulation

2. Distribution

3. Testing

4. Selling Climax

5. Buying Climax

The simplest way to understand these terms, and for me to explain them to you, is to go back to our analogy of the warehouse, which was also used
by Richard Ney in his books to explain this concept. This is what he said:

“To understand the specialists' practices, the investor must learn to think of specialists as merchants who want to sell an inventory of stock at
retail price levels. When they clear their shelves of their inventory they will seek to employ their profits to buy more merchandise at
wholesale price levels.”

I used the same analogy in my article for Working Money magazine many years later, which was the Parable of Uncle Joe.

The easiest way to think of volume in terms of the market price action, and this applies to all markets, is to use the wholesaling analogy. However,
in order to keep things simple, let's just refer to the specialists, the market makers, the large operators, the professional money, as the insiders
from now on. So, the insiders are the merchants who own the warehouses of stock and their primary goal is to make money buy buying at
wholesale prices and then selling at retail prices.

Remember also, in the following explanations, that in my VPA Principle No 2, the market always takes time to turn in a dramatic way, and this is
also borne out in Wyckoff's second law of cause and effect. We are always going to see small changes up and down, as the market pulls back or
reverses in a longer term trend. But, for the major changes in trend to occur, (and remember, a 'major change' can appear on a 5 minute chart or a
1 day chart) this takes time. The longer the time taken, (the cause), the greater the change (the effect). However, this does vary from market to
market. Some markets may take days, weeks or even months, before they are ready to turn dramatically, whilst other markets may take just a few
days. I will be covering this later in the book, once we start to look at the various nuances which apply to specific markets, as they all behave slightly
differently.

The key principles described here still apply. It's just the time frames and speed at which events occur that changes dramatically, and is due to the
different structure of each market, the role of the insiders in that market, and the role that each capital market plays as an investment or speculative
vehicle.

The first term we need to understand is accumulation.