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Donchian talks about looking for a volume climax especially when the markets have made extended runs. They can be tricky because there are times that what looks like a climax, is really renewed interest in the instrument you are watching.
Ensuring that price has advanced for a length of time can be a variable in your trading plan that you need to see before thinking that the climax may signal a change of state of the market.
Trading Tip: Just because the market “blows off”, it does not necessarily mean that a reversal is taking place. Markets rarely immediately reverse but tend to balance out before changing direction.
http://www.netpicks.com/chart-no-volume-indicator/ - READ MORE
The Chart Is All You Need
I want to continue on with my look
back on some of the pearls of wisdom
from Richard Donchian. There are so
many things that were valid decades
ago that are still applicable to the
trading of today.
My first look can be found at:
These two Donchian wisdom's center
around volume however markets such
as Forex, being a market without a
central exchange, don't have an
accurate measure of volume.
Trading Tip: Many traders who like to
incorporate volume will use the
currency futures markets in their
analysis but execute in the spot
That being said, there are quite a few
traders who don't use volume for any
reason citing that they could not find
any statistical edge using volume.
Instead, the term "that's different" is
used which simply indicates that
something unusual has happened
compared to recent price action.
When something different happens,
trading opportunities are looked for.
I am going to use charts without
volume so you can see how you can
use the "that's different" term in
relation to two more Donchian
Donchian talks about looking for a
volume climax especially when the
markets have made extended runs.
They can be tricky because there are
times that what looks like a climax, is
really renewed interest in the
instrument you are watching.
Ensuring that price has advanced for a
length of time can be a variable in your
trading plan that you need to see
before thinking that the climax may
signal a change of state of the market.
Trading Tip: Just because the market
"blows off", it does not necessarily
mean that a reversal is taking place.
Markets rarely immediately reverse
but tend to balance out before
This chart shows a market that has
been in a steady run up for quite a
while. It's not in this graphic but the
market has been making the stair
stepping trend pattern of higher highs
and lows. Suddenly, price rockets to
the upside and eventually rolls over.
Also highlighted on this chart with the
red circles is a pattern that is called "3
pushes". While this is one is a little
sloppy, combined with the "that's
different" pattern, and occurring after
the market breaks out of a range
(again just off this chart), I think it is
worthwhile to show.
At times it can be difficult to differentiate
between a climax move and just a strong
thrust that sets up a good pullback trade.
The key is to look for some type of price
action that shows that the lengthy move is
coming to an end as in the candle I've
highlighted with a green arrow in the
I find the blow off type of action very
useful when using a multiple time-
frame approach. For example: This
chart shows your standard trend-lines
and the break through the bottom plus
the "that's different" look of the three
preceding red candles, can alert you to
be cautious on the lower time-frame.
Looking at the smaller chart laid on
top, if you were short after the flag
you'd be able to see that the strong
move down is actually not just strong
selling interest but possibly the end of
the move. That would have you either
tightening up the stop or getting out
when the market begins to turn.
When price moves from advancing to
a period of dull price action, you can
get a great position and be in for the
meat of the price move.
So what do you look for in
the period of dullness?
This is another guideline that can be a
little tricky when not actually watching
the volume indicator. It relies on
watching a few patterns emerge on
the chart that may indicate that there
is a buildup of either buying or selling
pressure. There are three things that I
personally look for and they are:
1. Failure test of the low/high of the range
2. A buildup of a range of price
3. A continuation of the move with a
higher time-frame context
Let's break down this next chart
and for context, we are coming into
this off an uptrend on this time frame.
I used a weekly chart for clarity but the
daily chart shows the range in better
detail. We are also overextended on a
higher time frame so while not a
perfect trading example, it's the
concept that is important.
The #1 black line indicates the bottom
of the red candle which at that time
represented a the bottom of a small
range. You can see the test of the low
and price was soundly rejected and
would have made a tempting trade
Finding a trade location inside of this
smaller range given the location and
same time frame context, is not a bad
play. You get a favorable position in
this example prior to the break out of
However, as mentioned previously, the
larger time frame does appear over
extended and at this point, a reversal
candle has formed on the higher time
The key for the over-extension and
possible climax is looking for price to print
a "that's different" look to it. When this
occurs after a steady state run in either
direction, you can either look for a position
in the opposite direction or using the
higher time frame, filter out a trade that
may be at a dangerous point in time.
The second type explained above, for
me, is used to get into the current
trend unless higher time frame context
spells something different. I look for
an obvious pause in price and a sign
that price is rejecting, in this case,
Failing that, a smaller range forming
near the extreme of the range can
often make a great location to get into
While these may not be exactly what
Donchian was talking about, I wanted
to show that even without volume, the
chart itself can often spell out what
you need to know.
I encourage you to break out your
charts and see if you can identify
commonalities in various instruments
to not only verify this information, but
perhaps also build upon your own