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The Traders Wheel
8/29/98 by Alan Farley

Pattern Volume

New students of technical analysis believe profits come quickly by memorizing well-known patterns and locating them on their favorite stock charts. But flags, triangles and head & shoulders don’t fill wallets without considerable effort. Successful traders take the time to examine each chaotic swing within a congestion pattern to predict both the direction and timing of the eventual breakout.

Profitable positions depend on accurately reading the shifting emotions within the trading crowd. No tool provides better insight into this critical study than volume. Short-term bursts of accumulation/distribution within the confines of a trading range often reveal the bullish or bearish bias of the pattern.

As price bars snake back and forth, visually compare the short spikes of buying and selling to see which side is winning. When volume increases on short rallies and declines on dips, a bias exists for the bull’s successful outcome. Alternatively, fear revealed through a series of lower bars with increasing volume often signals an eventual breakdown. Regardless of direction, expect volume to decline overall as the pattern develops.

Use volume to locate your trade execution trigger. The apex of a completed pattern (just before the breakout) commonly exhibits the lowest participation of any point within that range. When properly located, traders can measure volume on subsequent bars to gather important feedback on the direction of the impending move. For example, if price surges out of an apex without building volume, odds increase the move will fade and reverse.

Always watch for the Silent Alarm. This rare one-bar event reflects intense crossroads of buying and selling pressure. Highly emotional trading spikes volume significantly near the apex of a pattern but a painful standoff develops and no breakout occurs. Smart traders recognizing the Alarm stand aside on these days but take positions in whatever direction price ejects out of that bar’s range.

The lowest volume within a pattern may not occur near its apex. As MFNX demonstrated in spring of 1999, congestion can pivot off a quiet center point between two zones of increased volatility and participation.
 
Alan Farley is a full-time trader and author residing in Denver, CO. He publishes The Hard Right Edge premier web site for trader education, technical analysis and trader resources featuring both Morning Trader and Traders Workshop. The site provides traders with comprehensive resources including original tactics and strategies on multi-trend technical analysis and short-term trading .

  Alan also authors on-line training technical analysis in association with independent sites. His most recent publications include the Mastering The Trade on-line workshop, Momentum: Riding The Tiger, and Time of Day. In addition to writing, he is an outstanding speaker and lecturer on short term trading strategies.

 He has been featured in Barrons, Smart Money magazine, Tech Week, MoneyCentral and TheStreet.com.

 

 

 
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Last modified: April 02, 2001

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