Prices and Candlesticks

Price Action and VPA: Unlocking the Full Market PictureWelcome back to your journey toward mastering Volume Price Analysis (VPA)! You’ve learned how insiders—market makers, specialists, and large operators—act as wholesalers, manipulating prices to their advantage, and how volume is your key to seeing through their moves. Now, we shift focus to the other half of the VPA equation: price action. Price encapsulates market sentiment, driven by fear and greed, but without volume, it’s only part of the story. In this chapter, we’ll explore how price action, particularly through candlestick charts, reveals insider intent, and why combining it with volume (VPA) and Volume at Price (VAP) provides a complete view of the market. We’ll dissect the elements of a candlestick, examine the impact of electronic trading, and set the stage for deeper volume analysis. With detailed explanations and practical tips, you’ll be ready to analyze price action like a pro across stocks, forex, futures, and ETFs. Let’s dive into the art of price and VPA!

The Timeless Power of Price Action

Price action—the movement of an asset’s price over time—captures the collective decisions of traders and insiders, reflecting fear, greed, and market sentiment. As Jesse Livermore famously said, “There is nothing new in Wall Street… whatever happens in the market today has happened before and will happen again.” Price analysis, like VPA, has been a cornerstone for over a century, evolving with the introduction of candlestick charts in the 1990s, which revolutionized how traders visualize markets. However, fads like Price Action Trading (PAT)—relying solely on price without volume—miss the mark, as iconic traders like Livermore, Charles Dow, Richard Wyckoff, and Richard Ney relied on volume to validate price moves.

• Why price matters: Price shows where the market has been, hinting at where it might go. Candlesticks reveal sentiment through their structure (open, high, low, close, wicks, and spread), but without volume, you can’t confirm if a move is genuine or an insider trap.

• VPA’s edge: VPA combines price and volume to validate sentiment (e.g., high-volume wide candles confirm trends) or spot anomalies (e.g., low-volume breakouts signal traps). VAP adds precision by showing volume concentrations at specific price levels, reinforcing support and resistance.

• Markets and timeframes: Price action applies to stocks, forex (using tick volume), futures, ETFs, and bonds, from tick charts to monthly charts. A candlestick on a 5-minute EUR/USD chart signals intraday moves, while a daily Tesla chart predicts weeks-long trends.

Example: Imagine price action as a movie (market sentiment) with scenes (candlesticks). Without volume (the soundtrack), you miss the intensity—insiders could be staging a quiet trap. VPA adds sound, and VAP maps the set (support/resistance), completing the story.

Tip: Open a charting platform (e.g., NinjaTrader, MT4, TradingView) with candlesticks and volume bars. Choose a market like Apple stock or GBP/USD, and study price action (e.g., wicks, spreads) alongside volume to spot insider moves.

The Evolution of Price Action—From Pit to Electronic Trading

Price action analysis has transformed with the shift from pit trading to electronic platforms, impacting how we interpret the four elements of a candlestick: open, high, low, and close. In the days of physical exchanges like the London International Financial Futures and Options Exchange (LIFFE), traders sensed market sentiment through the frenzy of the pit—yelling, hand signals, and order flow reflected volume. The introduction of electronic trading, particularly the CME’s Globex platform in 1992, changed this dynamic, making volume on charts essential to replicate the pit’s “feel.”

• Pit trading era: In physical exchanges (e.g., NYSE, LIFFE), the open and close were critical. Traders awaited the opening bell for sentiment signals, and frenetic closing activity shaped the day’s close. Gaps (open far from the previous close) were common, signaling strong intent, especially with high volume.

• Electronic trading impact: Globex enabled 24-hour trading for futures (e.g., ES E-mini for S&P 500, launched 1997), reducing the significance of cash market opens/closes. For example, overnight futures trading on YM E-mini (Dow Jones) forecasts the cash market’s open, smoothing gaps. Forex and commodities trade 24/7, with opens blending into prior closes, diminishing gap signals.

• Modern price action: In electronic markets, candlestick opens often match the prior close, especially in forex or futures, reducing gap significance. Stocks still gap on earnings or news, but index futures guide sentiment. Volume becomes critical to validate price moves, as insiders exploit electronic platforms (e.g., HFT strategies) to set traps.

Example: Picture pit trading as a live concert (market) with a roaring crowd (volume). Electronic trading is a streaming app—prices flow smoothly, but you need volume (sound) to gauge the vibe. VPA replaces the pit’s energy, spotting insider moves like high-volume climaxes.

Tip: On a 5-minute futures chart (e.g., ES E-mini), compare opens/closes to prior candles. If they align (no gaps), rely on volume to validate moves. On a stock chart (e.g., Tesla), watch for gaps on news and confirm with high volume for trend signals.

Dissecting a Candlestick—The Core of Price Action

Candlesticks, my preferred method for VPA (thanks to my mentor Albert), reveal market sentiment through seven elements: open, high, low, close, upper wick, lower wick, and spread (distance between open and close). These elements, when paired with volume, unlock insider intent, far surpassing bar charts or other formats like Heikin Ashi.

• Candlestick elements:

  • Open/Close: Show the session’s starting and ending prices, reflecting sentiment direction (bullish if close > open, bearish if close < open).

  • High/Low: Mark the session’s price extremes, showing the range of buyer/seller battles.

  • Upper/Lower Wicks: Indicate rejected prices—upper wicks show selling pressure, lower wicks show buying pressure.

  • Spread: The gap between open and close. Wide spreads signal strong sentiment; narrow spreads indicate indecision.

• Sentiment revealed: A wide spread with no wicks (e.g., a strong bullish candle) shows dominant sentiment, like a stock like Amazon closing near its high on earnings news. Wicks signal reversals within the session—long upper wicks (e.g., shooting star) show sellers overpowering buyers, long lower wicks (e.g., hammer) show buyers winning.

• VPA’s role: Volume validates candlestick signals. A wide bullish candle with high volume confirms a trend, while a narrow candle with high volume signals insider resistance (e.g., distribution). VAP shows where volume was concentrated (e.g., at the candle’s low for buying), refining support/resistance.

Example: Imagine a candlestick as a battle (session) between armies (buyers/sellers). The spread is the territory gained, wicks are failed attacks, and volume is the troop count. VPA checks if the army (price) is backed by reinforcements (volume), and VAP maps the battlefield (support/resistance).

Tip: On a 15-minute chart (e.g., EUR/USD), analyze candlesticks for wicks and spread. Look for long wicks (upper for selling, lower for buying) and check volume to confirm sentiment. Use VAP to see if volume clusters at the wick’s price level.

Why Price Action Alone Falls Short

Price Action Trading (PAT), which focuses solely on price without volume, is like reading a book’s cover without its pages. While price encapsulates news, trader decisions, and sentiment, it’s vulnerable to insider manipulation, especially in electronic markets where high-frequency trading (HFT) and news-driven spikes create traps. VPA completes the picture by validating price with volume, ensuring you don’t fall for fake moves.

• PAT’s limitation: Price shows what happened (e.g., a shooting star at resistance), but not why. Insiders use news (e.g., a false earnings rumor) to spike prices, trapping retail traders. Without volume, you can’t tell if a move is genuine or manipulated.

• VPA’s validation: High volume with a wide candle (e.g., a bullish breakout) confirms insider participation. Low volume with a wide candle signals a trap (e.g., a fake forex spike post-NFP). High volume with a narrow candle indicates a climax (e.g., insider selling at resistance).

• Market example: On a daily Apple chart, a wide bullish candle at $180 breaks resistance, but low volume warns of a trap—insiders are marking prices up to lure buyers. VPA spots this, and VAP shows low volume at $180, confirming weak resistance. A high-volume hammer at $170 signals accumulation, validated by VAP’s volume spike at that level.

Example: PAT is like navigating a ship (market) by stars (price). VPA adds a compass (volume), ensuring you don’t sail into a storm (trap). VAP maps the coastline (support/resistance), guiding you to safe harbors.

Tip: On a 1-hour chart (e.g., S&P 500 futures), analyze price action (e.g., wide candles, wicks) but always check volume. High volume validates moves; low volume or high-volume narrow candles warn of insider traps. Use VAP to confirm volume at key prices.

The Wick and Spread—Keys to Sentiment

The spread and wicks of a candlestick are the most revealing elements, showing sentiment shifts within a session. When paired with volume, they unlock insider moves, making them central to VPA.

• Spread analysis:

  • Wide spread: Strong sentiment, bullish (close > open) or bearish (close < open). For example, a wide bullish candle on a 5-minute ES E-mini chart post-Fed announcement signals strong buying, validated by high volume.

  • Narrow spread: Indecision or weak sentiment, often in congestion zones. A narrow candle with high volume (e.g., on a daily Tesla chart at $200) signals insider resistance, like a selling climax.

• Wick analysis:

  • Lower wick: Sellers push prices down, but buyers overwhelm, closing near the open. On a 15-minute GBP/USD chart, a long lower wick at 1.2500 with high volume signals insider buying (accumulation), confirmed by VAP’s volume spike.

  • Upper wick: Buyers push prices up, but sellers dominate, closing near the open. A long upper wick on a 1-hour Nasdaq 100 futures chart at 18,000 with high volume indicates insider selling (distribution), validated by VAP.

  • No wicks: Strong, uninterrupted sentiment. A no-wick bullish candle with high volume confirms a trend; low volume warns of a trap.

• Market example: On a daily crude oil futures chart, a narrow candle with a long lower wick at $70 and high volume signals insider buying after a sell-off, hinting at a reversal. VAP shows heavy volume at $70, reinforcing support. Conversely, a wide bullish candle at $80 with low volume suggests a trap, confirmed by VAP’s low volume at that level.

Example: Wicks are like a tug-of-war (session) with ropes (buyers/sellers). A long lower wick shows buyers winning; an upper wick shows sellers. Volume measures the rope’s tension, and VAP pinpoints where the pull was strongest (price levels).

Tip: On a 15-minute chart (e.g., EUR/USD), focus on candles with long wicks or narrow spreads. High volume with lower wicks signals buying; upper wicks signal selling. Use VAP to confirm volume clusters at wick levels.

VPA vs. VAP—Two Perspectives on Price and Volume

VPA analyzes the relationship between a candlestick’s price action (spread, wicks) and its total volume for the session, validating trends or spotting climaxes. VAP drills deeper, showing where volume was concentrated within the candlestick’s price range, refining support and resistance analysis. Together, they provide a dual perspective on insider moves.

• VPA perspective: VPA looks at the “big picture” of a candlestick’s volume versus its spread. A high-volume wide candle validates a trend (e.g., a bullish breakout in Apple at $185). A high-volume narrow candle signals a climax (e.g., insider selling in EUR/USD at 1.1000).

• VAP perspective: VAP dissects the candlestick, showing volume at specific price levels. High volume at a candle’s low (e.g., $100 in a stock) confirms buying and support, aligning with a VPA hammer. High volume at the high (e.g., $120) signals selling and resistance, matching a VPA shooting star.

• Market example: On a 1-hour S&P 500 futures chart, a high-volume hammer at 4,800 signals accumulation. VAP shows most volume at 4,800, confirming support. A high-volume shooting star at 5,000 with VAP volume at 5,000 indicates distribution, warning of a reversal.

• Integration: VPA identifies the signal (e.g., hammer), VAP pinpoints the price level (e.g., support at 4,800), and together they confirm insider intent. Low-volume VAP at a breakout price warns of traps, aligning with VPA’s low-volume wide candles.

Example: VPA is like a telescope, spotting market signals (trends, climaxes). VAP is a microscope, zooming in on price levels where insiders act. Together, they map the market’s stars (price action) with precision.

Tip: On a 30-minute chart (e.g., Nasdaq 100 futures), use VPA to spot high-volume hammers or shooting stars. Add VAP to see if volume clusters at the candle’s low (support) or high (resistance), confirming the signal.

Your Next Steps—Mastering Price Action with VPA

You’re now ready to analyze price action with VPA and VAP, decoding insider moves across markets and timeframes. Here’s how to put it into action:

1. Set up your charts: Use platforms like NinjaTrader (stocks, futures), MT4 (forex), or TradingView (all markets) with candlesticks, volume bars, and VAP (Volume Profile). Choose a market (e.g., Tesla stock, EUR/USD forex, ES E-mini futures) and three timeframes (e.g., 5-minute, 15-minute, 30-minute for scalping; daily, weekly, monthly for investing).

2. Analyze candlesticks: Focus on spread and wicks. Wide spreads with high volume validate trends; narrow spreads with high volume signal climaxes. Long lower wicks with high volume indicate buying (accumulation); upper wicks signal selling (distribution).

3. Validate with VPA: Check volume to confirm price action. High volume with wide candles (e.g., breakouts) validates trends; high volume with narrow candles signals climaxes; low volume with wide candles warns of traps. Use VAP to see volume concentrations at wick levels.

4. Trade news events: During volatile news (e.g., NFP, earnings), watch for high-volume hammers or shooting stars in congestion zones. Low-volume wide candles signal traps; VAP confirms if volume is low at breakout prices.

5. Use multiple timeframes: Spot price signals on the middle timeframe (15-minute), confirm with VPA/VAP on the slow timeframe (30-minute), and time entries on the fast timeframe (5-minute). A high-volume hammer on all three at support signals a strong bullish trade.

6. Practice daily: Spend 15-20 minutes analyzing one chart (e.g., GBP/USD, S&P 500 futures). Note candlestick spreads/wicks, VPA volume signals, and VAP price levels. Predict moves and check outcomes to build intuition.

7. Stay patient: Don’t trade on single candles—wait for confirmation (e.g., multiple hammers, high-volume breakouts). Markets take time to resolve, per Wyckoff’s Second Law. Use VPA to hold through low-volume pullbacks and exit on high-volume climaxes.

Analogy: Price action is a market’s pulse, with candlesticks as heartbeats. VPA measures the strength (volume), and VAP maps the rhythm (price levels). Together, they diagnose insider moves, guiding you to profitable trades.

Final Tip: Start with a demo account on a liquid market like EUR/USD or S&P 500 futures. On a 15-minute chart, analyze candlestick wicks/spreads with VPA volume signals and VAP price levels. Practice during news events, cross-checking across timeframes, and align with insiders. With dedication, you’ll trade with the precision of a market master!