Volume Candlesticks – See How to Trade with this Powerful Indicator


What are Volume Candlesticks?

If you are looking for information on volume candlesticks, then congratulations on the next evolution of your trading journey. What I mean by this is that you have gone beyond basic analysis and are doing deeper research.

Well in this post we will cover the topic of volume candlesticks from which you can make the determination if this charting style is a possible fit for you.

Structure of Volume Candlesticks

Volume candlesticks are comprised of the following information: open, high, low, close and volume. The one difference from the standard candlestick structure is the volume aspect. The volume then drives the size of the width of the candlestick.

Examples of Volume Candlesticks on the Chart

Volume Candlesticks

Volume Candlesticks

What are some of the things that pop out at you when reviewing the above chart?

First, the large size of the candlesticks in the morning. This is something you will consistently see when day trading.

The other thing to note is how you can have small candles right after large ones. These inside bars are moments of reflection where bulls and bears are trying to figure out which way the action will break.

The last thing you will notice is how volume slowly drifted lower into the close the prior day.

Breakouts with Volume Candlesticks

Breakouts are one of the hardest patterns to trade in the market, but they are also one of the most rewarding in terms of profit potential. The key challenge with breakouts is determining when the breakout is real versus when it’s just professional traders selling into the hands of other less informed retail traders.

Let’s review a few examples of breakouts and how volume candlesticks can help us dissect the action.

Breakout Example #1

In this first example, we are going to review a breakout to the downside.

Valid Breakdown

Valid Breakdown

In the above chart, notice how when price breaks down, it is followed by red candlesticks that are also large. If the second candlestick after the breakout candle was small and unable to go lower, this is your first sign that a reversal or at least a pause could be around the corner.

Let’s take a look at another valid breakout example.

Breakout Example #2

One of the hardest things to do when day trading is placing trades during the middle of the day. The head fakes are just everywhere once you get past 10 – 10:30. The breakout momentum from the opening bell has dissipated and moves higher are often where the newbies are stuck holding shares from professionals that have sold off into the strength.

Midday Breakout

Midday Breakout

Let me first say it is very rare for the midday or late in the day breakout to occur with more volume than the morning. So, don’t expect these huge volume candlesticks that somehow dwarf the morning trades.

Not saying it can’t happen, it’s just rare.

Back to the example, notice how the candle breaks through with a solid white candle after about ten smaller back and forth candlesticks.

This large white candle shows you that price was able to hold and do so with volume. This gives you validation that you just need to wait for the price to exceed the high of this large candlestick for you to open a long position.

Unlike the morning trade where you can buy breakouts almost purely based on price action because you know the volume always comes in, you will need to obsess over volume from the midday to increase the odds of your trades working out.

False Breakouts with Volume Candlesticks

Failed Breakouts

Failed Breakouts

As you can see the volume and price do not accompany the breakout. Again as mentioned earlier, with the midday breakouts you have to be patient and let that first 5-minute bar develop.

The method is simple: if the candle is red on the breakout and the width is small, there is likely a possible reversal in play. At this point, your alarms should be going off and shifting from profit to protection.

Trend Continuation with Volume Candlesticks

Another method for using volume candlesticks is to determine when to enter continuation patterns. This is a great method for jumping on a strong trend.

Pullback/Continuation Example

Pullback Volume Candlestick

Pullback Volume Candlestick

In this example, FRC had a nice runup in the morning and then formed a doji.  As you can see the doji was small relative to the large white candle from the morning that it was testing.

So, how do we set up the trade?

Well, the doji also presents itself after four black crows (I know the candles are red). You want to buy the break of the last red candle with a stop below the doji.

Your profit target is the most recent high, which will give you a 3 to 1 risk reward ratio. Check out the below visual which illustrates this setup.

Pullback Setup - Volume Candlestick

Pullback Setup – Volume Candlestick

Ride the Trend with Volume Candlesticks

I have yet to figure this one out.

Let’s explore how volume candlesticks can potentially help identify when the market is trending hard and when you need to hold on to your position for larger gains.

Riding the Trend

Riding the Trend

In this example, you can see that there are some up candles and when red candles do present themselves, they do so with little volume.

In these scenarios, you want to sit back and let the candles do the hard lifting. We don’t receive a large red candle until near the close, at which point you have already made a sizeable profit.

Strong Uptrend

Strong Uptrend

The market continues to go higher in this next example with a few red candlesticks. Again, the key point is that there are no large candlesticks showing up on the chart.

The one point I want to call out is that a large red candlestick can always show up out of nowhere.

So, you need to keep stops beneath key price levels to ensure you don’t give back gains in minutes that you have been accumulating all day riding a strong wave.

How Can Tradingsim Help?

Tradingsim provides the most realistic market replay experience, and we also have volume candlesticks. Test drive the strategies you see in this article and others from around the web which can help you achieve your trading goals.

To see more on volume candles and candlesticks in general, check out Steve Nison’s website.

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