How to Trade with EquiVolume Charts
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.
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.
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.
Did you know that...
- Understanding one's personal risk tolerance, driven by individual psychological factors and life circumstances, is foundational for constructing a suitable investment strategy?
- Overconfidence bias can lead investors to overestimate their knowledge, underestimate risks, and subsequently make suboptimal decisions?
- An investor's time horizon is crucial in determining their investment strategy, with longer horizons typically allowing for greater risk-taking?
- Growth stocks are companies expected to grow their earnings at an above-average rate compared to other businesses in the market?
- Starting your investments early can lead to significantly larger returns due to the magic of compounding, even if you invest smaller amounts?
Quotes of the Day:
- "The best investments are the ones that have a strong management team." - Mario Gabelli
- "Investing is not about being right all the time, it's about minimizing your mistakes." - John Rogers
- "Investing is about managing risk, not avoiding it. You need to be willing to take calculated risks in order to achieve your financial goals." - Steve Cohen
- "Investing is about understanding the risks and rewards of different opportunities." - Louis Bacon
- "The best way to make money in the stock market is to buy low and sell high." - Leon Cooperman
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