In the early 1900s, Richard Wyckoff developed a theory that still rules Wall Street today. It's called the Law of Effort vs. Result.
- Effort: Volume (How much gas you put in the car).
- Result: Price Movement (How far the car traveled).
In a healthy market, Effort matches Result. Big Volume = Big Candle. Small Volume = Small Candle.
The Trade Signal appears when there is an Anomaly (Divergence). When you put your foot on the gas (High Volume) but the car doesn't move (Small Candle), something is broken. A reversal is imminent.
1. How to Read Volume Bars: A Quick Guide
The standard volume indicator at the bottom of your chart provides crucial context. Here's how to read it:
- Green vs. Red Bars: A green volume bar means the corresponding price candle closed higher than it opened. A red bar means the price candle closed lower.
- Volume Moving Average (VMA): Add a moving average (e.g., 20-period) to your volume indicator. This helps you instantly identify if the current volume is "above average" or "below average," which is critical for spotting anomalies.
- Relative Volume: Always compare the current volume bar to the preceding bars. Is volume increasing, decreasing, or flat? This trend in volume is often more important than a single bar.
2. The Anomaly: Stopping Volume & Climactic Volume
The most powerful volume signals occur when there's a clear divergence between Effort (Volume) and Result (Price).
Stopping Volume (Bottoming Signal):
Imagine price is in a free-fall with large red candles. Suddenly, a candle prints with an Ultra-High Volume Spike, but the candle itself is very small (a Doji or a Pin Bar) and fails to make a significant new low.
The Question: If there was so much selling volume, why didn't the price drop further?
The Answer: Because "Smart Money" was absorbing all the sell orders with massive limit buy orders. This "Stopping Volume" often marks the exact bottom of a trend before a reversal.
Climactic Volume (Topping Signal):
The opposite is true at the top. After a long bull run, price goes parabolic. You see a massive green candle on the highest volume in months.
The Question: Who is selling at the top?
The Answer: Institutions are selling their positions ("distributing") to the retail "FOMO" crowd who are panic-buying at the peak. This Buying Climax often marks the end of a trend.
3. The "No Demand" & "No Supply" Bars
This is a core Volume Spread Analysis (VSA) concept for timing low-risk entries.
- No Demand Bar (Bullish): In an uptrend, price pulls back on Ultra-Low Volume. This shows that there is no selling interest or "demand" for lower prices. The sellers have dried up. The path of least resistance is up. This is a strong signal to buy the dip.
- No Supply Bar (Bearish): In a downtrend, price rallies weakly on Ultra-Low Volume. This shows a lack of buying interest. The buyers have disappeared. The path of least resistance is down.
4. The Breakout Test: Confirmation by Volume
You see price break above a key Resistance level. Is it real or a trap? Volume provides the answer.
- Real Breakout: Must be accompanied by a High-Volume spike, significantly above average. This shows institutional conviction and the fuel needed to push through the level.
- Fake Breakout (Upthrust): The price pokes above resistance, but on Low Volume. This is a major red flag. It indicates a lack of interest from big players. The move is likely driven by retail stops and will probably reverse, trapping breakout traders (a "Bull Trap").
5. Limitations of Volume Analysis
While powerful, traditional volume analysis has limitations:
- Decentralized Forex Volume: In the Forex market, there is no central exchange. The volume you see is only the volume from your specific broker, making it an estimate and less reliable than stock or futures volume.
- Context is King: A high-volume bar is meaningless without context. Is it a breakout bar, a stopping volume bar, or a news-driven spike? You must always analyze volume in relation to price action and market structure.
6. Summary
Volume is the only truly non-lagging indicator. It reveals the force and conviction behind price movements. Before taking any trade, act like a detective and analyze the volume. Is the "Effort" (Volume) confirming the "Result" (Price)? If not, something is amiss, and it's often best to wait for a clearer picture.