Price and Volume, Lessons in "Divergence"

Hello Traders-

I just wanted to post a very nice example of one of the key pieces of information I am always looking for on the charts/markets I trade. This is a 30min chart of the EUR/JPY pair, showing a very nice example of the price/volume relationship explained in this post. Enjoy!

The example put forth in this chart is known as a "divergence", simply implying that conflicting information is being produced in opposition to what would either normally be expected, or required to confirm a signal to buy, sell, or hold.  I do not look for "confluence" or agreement in my signals, I look for "divergence" as this is a sign of imbalance, traders being on the wrong side, or simply something that has become long in the tooth and the trend is reaching a point of exhaustion.  When combined, Volume and Price can tell an incredibly powerful story with regard to true strength and or validity of a price move.  When we see Volume, we are seeing a valuable gauge for measuring participation in the market. How valid is the move taking place?  Can we expect this trend to continue because we see a strong move in price backed by a strong move in volume, or can we expect this move to be short-lived or simply a 'head-fake' due to a thin market?  We know when there is a strong agreement between prices and volume, the trend has support and strength. A trend like this must be respected, not ignored.  When we have rising prices and rising volume, the move upward in price is confirmed, and we can make further decisions based upon this information.  When prices are moving down, and volume is moving up, we also know that this move is powerful and has support for further movement.  The key "divergence" we are looking for is when the price and volume DO NOT AGREE.  That is a key sign that something in the market is not right, and most likely it is not sustainable either.  When we see falling prices WITH falling volume, we know that less and less participation is taking place as the prices fall. People are withdrawing, and waiting.  When we see prices moving up WITH falling volume, we similarly know that the movement up is not supported by the majority of market participants.  Find volume trends and corresponding price trends, and you will also find that your entry/exit points become much more accurate.  Of course, we cannot ignore everything else as we know that prices can be affected by all sorts of unknowns, but as traders, volume and price relationships are one of the most powerful signals we can use to determine when to get it, when to get out, when to hold, when to sit out, and so on and so forth.  Happy Trading!