The Charts I Use
I use a revised version of the Equivolume Charting system, created by Richard Arms. Richard W. Arms, Jr is one of the greatest technicians in the history of market analysis and the creator of technical tools such as the Arms Index (also known as TRIN), Equivolume Charting, Ease of Movement and Volume Adjusted Moving Averages. Mr. Arms is also the author of several books, where he explains how the above tools and indices are calculated and their best use. For those of you who would like a more in-depth knowledge of these tools, Richard Arms’ books can be purchased on Amazon. It is definitely worth the small investment (especially in used condition for just a few dollars.)
What are Equivolume Charts ?
Equivolume charts visually combine the price and volume data available for each trading period (be it daily, weekly or intraday such as 5 min, 15 min). While the bars created by the OHLC or the Candlesticks method only show the price data, the equivolume method incorporates volume as the width of the bar. The wider the bar, the larger the volume that day (or whatever time period used).
Note that unlike the first 2 types of bars, the equivolume bar does not display the Open Price and the Close Price. (The reason for that omission is that Richard Arms believes that the Open and the Close are easily manipulated by market makers and hedge funds, and therefore should be disregarded.) It only shows the Day High and Day Low and the MidPoint. The MidPoint is simply the middle of the Day Range. The Equivolume method is primarily concerned with the Day Range and the Day Volume.
Interpreting Individual Equivolume Bars
Advantages of Equivolume Charting
Convenience. The obvious advantage of Equivolume charts is that they make it easy to consider volume as part of the whole picture, when analyzing a stock chart. Yes, you can add the volume on the bottom of most charts, but matching the volume to its corresponding price bar can be time-consuming and can lead to errors.
The Health of the Trend. In an uptrend, heavy volume should come on up-days, and during pullbacks volume should dry up. If the trend seems to have reversed, big volume in the new direction proves that a change in bias is real.
Forecasting a trend pause or reversal. When will the current trend or short move end ? The extent of a move is predetermined during the consolidation that precedes it. When the big buyers have sold all the stock they accumulated before the trend began, the move will be exhausted. No other charting method can estimate that because other charts show time on their horizontal axis. However, moves are not exhausted after a certain number of days, but after the accumulated amount of stock is distributed at higher levels. The combined width (volume) of the daily bars during the consolidation (or base) will approximately equal the combined width of the bars during the rally. Of course the same estimation works for the volume during a consolidation preceding a decline. See example below:
Modified Equivolume Charts
As you have seen on the preceding 2 charts, I don’t use the classic equivolume charts. The charts I use are a hybrid between equivolume and candlesticks. The modified chart’s bars show the Open and Close levels, unlike classic equivolume bars. This is mostly due to my own preference. The only real advantage over classic equivolume is that it makes it possible to identify candlestick patterns such as Shooting Star and Hanging Man. Overall, both Classic and Modified Equivolume charts work amazingly well.
Charting Software Platforms that Provide Equivolume Charts
