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How to Trade with EquiVolume Charts

- Cory Mitchell

EquiVolume charts combine both price and volume information into every bar. The bar, or rectangle in this case, represents the high and low price for the period, and its width reflects volume. This chart type was developed by Richard W. Arms Jr and similar to candlestick charts, EquiVolume charts are highly visual.

What's Unique About EquiVolume Charts?

EquiVolume charts have a very simple construction. Each rectangle/bar (hour, day, week, etc.) shows the high and low price for the period. The width of the bar shows the period’s volume; the wider the bar, the greater the volume.

See also How to Read Stock Charts: 10 Things Every Trader Should Know.

The advantage of EquiVolume charts is that you get pertinent price information (high and low) for each period, and volume is included right in the price data. The downside is that EquiVolume charts don’t show the open or close (just the high and low). CandleVolume, another type of chart, shows all the candlestick information, yet also incorporates volume.

All charts courtesy of StockCharts.com.

In Figure 2, each bar only contains the high and low price. Unlike candlesticks, which are uniform in width, the width of EquiVolume bars vary by volume.

How Are Equivolume Charts Made?

EquiVolume charts are based on simple concepts. A bar is black/green if the close of that period is above the prior closing price. A bar is red if the close of that period is below the prior closing price.

Each bar marks the high and low for the period – the top of the bar is the high, and the bottom is the low.

The width of the bar is total volume (for look back period) divided by that period’s volume. For example, if looking at a three month daily chart, calculate the total volume for the three month period. The width of each candle reflects that period’s volume as a percentage of the total. This is why big volume days are “fat,” and very low volume days are skinny (see Figure 2).

Be sure to also read about How to Trade with Heikin-Ashi Candlesticks.

How Do You Read an EquiVolume Chart?

Since EquiVolume charts show highs and lows, trend analysis is conducted through the use of trendlines, or other trend following indicators such as a moving average. In an uptrend, the price must make overall higher highs and higher lows, and in a downtrend, lower highs and lower lows.

Volume is frequently used in technical analysis to confirm breakouts. Breakouts on large volume are more likely to succeed, while breakouts on low volume are more likely to fail since fewer traders are interested.

Note chart patterns—such as trading ranges, trend channels, triangles or head and shoulders—and then await a breakout. The EquiVolume bars should ideally be wider when the breakout occurs. This signifies volume is increasing, and the breakout is more likely to succeed.

While increasing volume helps confirm a breakout, climactic buying and selling often indicates a top or bottom, and a reversal of the prior trend. For instance, in Figure 5 an extremely wide EquiVolume bar signaled the bottom of a downtrend, and ultimately a reversal higher.

Learn more about Trend Reversals: How to Spot and How to Trade.

In Figure 6, climactic buying indicated there were few buyers left to continue pushing the price higher, and price reversed lower.

Benefits and Limitations

EquiVolume charts visually incorporate volume into the price data. This can highlight potential turning points, like those shown in Figures 5 and 6. Wide bars can also help confirm breakouts.

EquiVolume charts lack all the price information of candlesticks or OHLC charts. Mainly, the open and close price of each candle aren’t shown. Not a problem for longer-term traders, but for shorter-term traders this lack of information may be an issue. CandleVolume charts are a candlestick chart but the width of the candle varies by volume. This type of chart shows the open, high, low, close and volume on each price bar.

See our Ultimate Guide to Analyzing Trading Volume.

While volume aids in analysis, and thus EquiVolume have attained some popularity, increasing volume doesn’t always accompany a legitimate breakout. Also, very high volume doesn’t always indicate a top or a bottom; it’s just an additional tool. As with any type of chart, use trend analysis, trendlines, indicators and/or other forms of analysis to verify what you’re interpreting on the EquiVolume chart.

The Bottom Line

EquiVolume charts show the high and low price for each period, and the width of the bar reflects volume. This chart type provides some analytical insight, such as showing when a breakout is occurring on increasing volume, and when buying or selling is potentially reaching a climax. EquiVolume charts don’t show the open and closing price, which may be an issue for shorter-term traders. There are no guarantees that increasing volume on a breakout will result in a winning trade, or that very high volume signals a top or bottom in price. As always, be sure to use other forms of analysis to confirm your interpretation of the EquiVolume chart.

Related Resources:

Quotes of the Day:

  • "Even a mistake may turn out to be the one thing necessary to a worthwhile achievement". - Henry Ford
  • “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” - Warren Buffett
  • "Value stocks are about as exciting as watching grass grow, but have you ever noticed just how much your grass grows in a week". - Christopher Browne
  • "The stock market is filled with individuals who know the price of everything, but the value of nothing." – Phillip Fisher
  • “Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” - Charlie Munger