Page 75 - A Complete Guide to Volume Price Analysis: Read the book then read the market

seen other traders making nice profits from the move lower, and finally overcome their fear of trading, and make an emotional decision to join the
market.

The market immediately reverses against them and bounces higher locking them instantly into a losing position, which then worsens. Fear mounts
as the losses increase.

Finally the market reverses back to where they first entered their position, and they exit, relieved to have been able to close out with just a small
loss.

The strong traders are selling into the market at the tops of the waves, and their positions are generally positive throughout as the market moves
back and forth in the trading range.

Once again, the price consolidation creates the invisible barriers which are then densely populated with both weak and strong groups of traders,
and which then become platforms either of support or resistance during future market activity.

I hope the above explanation has at least given you an insight into why these levels are important. What this constant price action creates is
invisible barriers and platforms all over our charts, which we then 'see' by joining up the price action at the top and bottom of each wave with
horizontal lines. These give us the visual perspective on where these regions are on the charts. Each time future price action approaches these
regions, because of the dense population of buyers and sellers marooned in these zones, we can expect the market to at least pause and 'test'
these areas in the manner I will be covering shortly.

Of equal importance is when the market pauses in one of these areas, but then continues on its journey in the same direction as the original trend.
Both of these have important consequences and send us key signals, all validated with volume, which we will look at shortly. But first, let me set out
some general principles when using this analytical technique.
First Principle

The lines we draw on our charts to define the ceiling and the floor of these price regions are NOT rods of steel. Consider them more as rubber,
flexible bands. Remember, technical analysis and VPA is an art, and NOT a science. Whilst these levels do constitute barriers and platforms, they
are not solid walls, and on occasion you will see them broken, only for the market to then move back into the channel once again. Consider them to
be 'elastic' with a little bit of 'give'.

Second Principle

Always remember Wyckoff's second law, the law of cause and effect. If the cause is large, then this will be reflected in the effect, which applies to
support and resistance. The longer a market consolidates in a narrow range, then the more dramatic the resulting price action once the market
moves away from this region. Naturally this is all relative, not least because a market that has been consolidating on a daily chart for several weeks
is likely to trend for a similar period, whilst any breakout from a consolidation phase on a 5 minute chart may only be for an hour or so – it is all
relative.

Third Principle

The third principle is perhaps the one which perplexes most new traders and it is this – how do I know when the market is in congestion? After all,
it's easy to look back in hindsight and see where the price action has been consolidating for some time, but when the market action is live, it is only
'after the event' that any consolidation phase becomes self evident.

This is where the concept of an isolated pivot high and an isolated pivot low become key signals, and whilst there are indicators available to create
these automatically, they are simple to spot visually.

Isolated Pivots