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Equivolume
Description
Developed
by Richard W. Arms, Jr., and explained in his book
Volume Cycles in the Stock Market,
Equivolume presents a highly informative picture
of market activity for stocks, futures, and
indices.
Equivolume
departs from other charting methods with its
emphasis on volume as an equal partner with price.
Instead of being displayed as an
"afterthought" on the lower margin of a
chart, volume is combined with price in a
two-dimensional box.
The top line of the box is the high for the
period and the bottom line is the low for the
period. The
width of the box is the unique feature of
Equivolume charting; it represents the volume of
trading for the period.
The
width of the box is controlled by a normalized
volume value. The
volume for an individual box is normalized by
dividing the actual volume for the period by the
total of all volume displayed on the chart.
Therefore, the width of each Equivolume box
is based on a percentage of total volume, with the
total of all percentages equaling 100.
The
following illustration shows the components of an
Equivolume box:
The
resulting charts represent an important departure
from all other analytical methods, in that time
becomes less important than volume in analyzing
price moves. It
suggests that each movement is a function of the
number of shares or contracts changing hands
rather than the amount of time elapsed.
Perhaps
the Equivolume charting method is best summed up
by the developer himself as follows:
"If the market wore a wristwatch, it
would be divided into shares, not hours."
Interpretation
The
shape of each Equivolume box provides a picture of
the supply and demand for the security during a
specific trading period.
Short and wide boxes (i.e., small change in
price combined with heavy volume) tend to be seen
at turning points, while tall and narrow boxes
(i.e., large change combined with low volume) are
more likely to be seen during continuing moves.
Especially
important are boxes which penetrate old support or
resistance levels, since it takes
"power" to create a reliable
penetration. A
"power box" is one in which both height
and width increase substantially.
Lack of box width, due to light volume,
puts the validity of a breakout in question.
The
more volume in a top or bottom consolidation, the
larger the ensuing move is likely to be.
Volume is directly observable on an
Equivolume chart by noting the overall width of
the consolidation.
For
an in-depth understanding of Equivolume, we
recommend the book Volume Cycles in the Stock
Market by the developer, Richard W. Arms, Jr. |
