The equivolume chart is created by drawing a rectangle for each day or other time period. So days with heavy volumes have fat rectangles, and light trading days have narrow rectangles. Going back to first principles, a higher volume indicates a stronger trend, and light volume may mean not much support for the current move. For a normal bullish price breakout, you can expect to see much wider rectangles. If you are in an uptrend, you can expect the down days to be narrower, and not so well supported by the trading.
The interesting thing about the Dow Jones Industrial Average shown above is that the retracements in what is ostensibly an uptrend are showing much greater volume. The in trend advances look much lighter, and this is not what would be expected.
Trading Information in Equi Volume Charts
As many industry pundits have pointed out, the stock market looks like a treacherous place to be invested for the long-term at the moment, and there are repeated calls that another crash or adjustment is imminent. Equivolume was developed by Richard Arms, who is better known for the Arms Index, along with many other innovative technical analysis solutions. When comparing the two different types of chart, you can instantly see the advantages of equivolume.
The major downside to the equivolume chart is that it makes traditional pattern drawing analysis very difficult.
Day Trading with Equivolume Price & Volume Analysis - Easycators Thinkorswim Downloads
Equivolume does have its limitations around drawing on to price but again, like we saw in last weeks Point and Figure article, technology advancements now allow the user to modify almost any chart and equivolume is not an exception. You can still create technical trading strategies around equivolume alone. Again, using the charts from StockCharts.
Some indicators are on price, others under it.
Examples: Equivolume Charting Revisited
Equivolume is one of those things you will either love or hate. It does have its limitations, but can also be used as a highly effective trading and investing tool on its own or in collaboration with other technical analysis methods. The shape of each Equivolume box provides a picture of the supply and demand for the security during a specific trading period.
Short and wide boxes heavy volume accompanied with small changes in price tend to occur at turning points, while tall and narrow boxes light volume accompanied with large changes in price are more likely to occur in established trends. Especially important are boxes which penetrate support or resistance levels, since volume confirms penetrations.
A "power box" is one in which both height and width increase substantially. Power boxes provide excellent confirmation to a breakout.
A narrow box, due to light volume, puts the validity of a breakout in question. You can see that this hybrid chart is similar to a candlestick chart, but the width of the bars vary based on volume. Figure 46 shows the components of an Equivolume box: Figure 46 The bottom scale on an Equivolume chart is based on volume, rather than on dates. Interpretation The shape of each Equivolume box provides a picture of the supply and demand for the security during a specific trading period.
Example The following Equivolume chart shows Phillip Morris' prices. The following is a Candlevolume chart of the British Pound. This online edition of Technical Analysis from A to Z is reproduced here with permission from the author and publisher.
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