Arms' Ease of Movement: Adding Volume to the Equation
Technical analysis is the study of historical price and volume activity with the hope of identifying patterns or behavior that may predict future price movements. For many, however, volume is an afterthought, relegated to a small bar chart below the price chart.
While price movement is of primary importance, volume analysis can play an important role in confirming price trends as well as price breakouts. High volume provides reassurance that a trend will continue while low volume is more prevalent during periods of indecision or consolidation.
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The singular role for the majority of chart types, such as line, bar, and traditional candlesticks, is to plot prices—open, high, low, close, etc. One exception to this is equivolume, which was introduced by Richard W. Arms Jr. This method is unique in that it places price activity and trading volume on an equal footing, combining these elements into two-dimensional boxes that represent each trading period. Figures 1 and 2 show bar and equivolume charts for General Dynamics.
The bar chart in Figure 1 provides four price points for each trading period—the open, high, low, and close. While this chart is good at illustrating the relationship between the high and low prices as well as the open and close, it is lacking a key element of technical analysis—the trading volume behind this price movement.
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