So if I'm looking at the per-bar delta on an exhaustion, wide spread, high volume bar, is it true that I should be seeing sell volume on a down move, and buy volume on an up move?
From my understanding of "strength in down bars" and "weakness in up bars", it's because the aggressive market-order buyers (in an up bar) are being exhausted and that passive, limit-order sellers are absorbing that volume. Is my fundamental understanding correct?
In the third arrow I've drawn, it seems the sellers have started to enter, and this may be termed a "churn bar" but I'm no expert. What do you think?
A wide spread, high volume bar shows that one side - either the bulls or the bears - are clearly in control, and you should see buy volume on an up move and sell volume on a down move. These bars are either breakout, continuation or climax bars, which means that they either start a move, show that a move is continued or that they lead to exhaustion to a move. Note the similarity with breakway, continuation and exhaustion gaps. The meaning is identical.
Your first arrow is a continuation bar.
Your second arrow is a climax bar.
Your third arrow is a spinning top just where the prior high was tested. It is a narrow range high volume bar and therefore qualifies as a churn bar. The second spinning top confirms it, so it would be a nice short.
Weakness in up bars will show, when the ranges narrows down. There are two types of tops.
This is a climax bar, followed by a churn bar. The bulls have raced too high, while the bears were lying in ambush. This is the situation, where passive sellers absorb all the buying of the bulls. Typically the passive sellers are higher time frame traders, which do not share the views of the shorter term traders.
(b) the wedge top:
This a gradual slow down of the movement of the bulls. There is no climax or further ambition. Volume dries up until the last bull thinks that he has gone too far. You won't get any climax or churn bars in this type of market. The wedge can extend for a longer time than expected.
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Thanks so much FT! In the chart I posted, I take it this is more of the climax type of top, correct? Is there an example you can readily find that is not a climax top or bottom? I recall seeing tops and bottoms that don't have climactic volume, but perhaps one that you think is a good example?
- Do you feel that volume from the currency futues (6E, 6J, etc) is accurate enough to use for VSA-type analysis?
- Is it sound logic to look for the following, as in the chart: large delta (positive in an up move) on the climax bar, and on a final 2nd or 3rd push exhaustion (the spinner in my chart) either an almost neutral delta or a slightly negative delta? The logic would be that the delta is higher on the continuation and climax bars as aggressive buyers are absorbed by passive sellers, whereas in the beginning stages of the reversal itself, the sellers themselves become more aggressive and thus have the strength to push price down.
Near the end of the day today, I "mind traded" this (not confident enough with this stuff yet to really trade it). The reversal bar which dipped below the even level, I presume to probe for interested sellers, was a good signal to go long, IMO, and it was on higher volume, which was a plus. Now, the following two bars (at the close) were high volume as expected, but they were both up closes and had negative delta. As the bars were forming, in my "mental trade" this gave me the confidence to stay in the trade, as this indicated to me that the passive buyers absorbed even more aggressive sellers, and with aggressive buyers pushing it up, this seemed to be a bullish sign. Again, how's my logic here? Sometimes you think something makes sense until someone enlightens you and makes you realize how stupid the idea was :-) Just testing myself here against your experience!
Actually I do not think that volume tells you a lot. The only exception are outstanding high volume events. If I see those bars on March 14, 15 and 16 - that tells me something. That is either a breakout or a reversal. When price moved up, it came out as a reversal.
I would have also noticed the churn bar on March 9. It was an extremely narrow range on high volume. Such days typically precede breakouts. The next day became violent because the trapped longs had to cover.
The volume on March 25 has no meaning for me. I do not pay attention to any bars which are not climax or churn bars.
March 9 volume looks to be equal or lowest volume of past 12 days .. why do you say it's a high volume bar? You mean relative to the spread perhaps?
As for currency futures, do you think this volume is really representative of the global interbank forex system? I mean, it might be close, but how can a few hundred thousand contracts from the CME be a good proxy? It may work fine, I just don't see how they could be so closely correlated as to be accurate enough to use in VSA.