Page 65 - A Complete Guide to Volume Price Analysis: Read the book then read the market

Fig 6.13 The Long Legged
Doji

Why is low volume on such a candle an anomaly? Well, let's think about this logically. The market has moved sharply in both directions and finally
closed back or near the opening price. This price action is a sign of volatility in the market, as the market has swung back and forth in the session. If
the market were not volatile, then we would see a very different type of candle. Therefore, if the market is volatile, why is there low volume.

Volatile markets require effort and as we know effort and result go hand in hand. However, in this instance we have no effort (low volume) and a big
result (wide price action). Clearly this is an anomaly, and the only logical answer is that the price is being moved by the insiders, who are simply not
joining in at the moment. The most common reason for this is stop hunting, where the market makers and insiders are moving prices violently, first
one way and then the other, to shake traders out, and to take out stop and limit orders in the process. They are not buying or selling themselves, but
simply 'racking' the price around, generally using a news rel Cng ume) and ease as the catalyst, and this brings me to an important point in the VPA
story.

The long legged doji is seen most often during a fundamental news release, and the classic one for the US markets is the monthly Non Farm
Payroll data, released on the first Friday of every month. On the release, price behaviour becomes extremely volatile, where this candle is created
repeatedly when economic data such as this is released. The market swings violently one way, then the other, and then perhaps back again. It is
the ideal opportunity for the insiders to whipsaw traders in and out of positions fast, taking out stops and other orders in the market at the same
time.

And the reason we know this is happening is volume, or rather the lack of it. If the volume is low, then this is NOT a genuine move, but an
ANOMALY. For the price to behave in this way takes effort, and we are seeing this with no effort, as shown with low volume. The insiders are simply
manipulating prices, and in this case, the long legged doji is NOT signalling a reversal, but something very different. Insider manipulation on a grand
scale at this price level. It may well be that the market does reverse later, but at this stage, we stay out, and wait for further candles to unfold.

The next point which leads on from this is the interaction between volume and the news. Whenever we have an economic release, a statement, a
rate decision, or any other item of fundamental news, then the associated volume reaction will instantly tell us whether the market is validating the
news or ignoring it. In other words, here too volume validates the news release, and tells us immediately whether the market insiders are joining in
any subsequent price action or waiting on the sidelines and staying out.

If the insiders are joining in, then we can too, and if not, then we stay out, just like them.

For example, when a 'big number' is released, say NFP, which is seen as positive for risk assets such as equities, commodities and risk
currencies, and perhaps we are trading a currency. Then we should see these assets rise strongly on the news, supported by strong and rising