Tuesday, April 27, 2010

Utilizing Price by Volume Bars for Trade Strategies and Ideas

I have simplistic charts because I have simplistic methods. I want to share with you a trade technique that I use that I've found to be very successful. One way to look at the complexion of a chart is to utilize volume by price bars. Before launching into more narrative, let me put up a chart:


A few key points:

  • The stock has made a significant relative high

  • The stock has traded in a 2-month range with very high volume during this time frame.

  • It has a 6% short float over the past couple of months.

When I look at this chart, I see instability in the current price range. If the chart were flipped, I would find that long volume by price bar as being very stable, and I've enclosed an example of that for you. At its current price range, this chart looks very top heavy to my eye. The short VbP bars are like an air pocket--a vacuum if you will. This stock price could hit that air pocket and fall to the $43 area quickly.

This might be a stock that you might consider putting on a watch list as it might be at or approaching an intermediate level to short. My point is not to recommend this stock as a short, but rather to demonstrate how looking at volume by price bars can give you a dimension of information that is not otherwise readily apparent.

Here's another chart, COST, that has another promising (VbP) configuration:


Remember, this set up works on the long side too. Here's a chart of FTWR, as stock that I have a long position in.


I want to share one last chart with you. It is a Renko chart. I posted a link to this chart back when I originally created it in September, 2009 of the NYSE composite. I believed the lack of VbP air pocket above would suck the price upward. (I note that I could have easily been wrong, but this chart was part of my 'weight of evidence.'


There are no sure things when we look at charts, but VbP information adds a dimension to your chart review that may help you see opportunities and/or hurdles that you might have missed without the volume profile

Position: long FTWR.