Prolume = Price + Volume

In this post, I want to simplify the "prolume" action for you.

There are 3 states of volume:

- High Volume

- Low Volume

- Average Volume

Here is my definition:

- High Volume: Actual Volume > SMA

- Low Volume: Actual Volume < SMA

- Average Volume: Actual Volume = SMA

I use the 10 SMA on the volume on the weekly timeframe chart.

The weekly timeframe chart is the best timeframe to study prolume action.

The daily timeframe chart has a lot of noise.

I recommend mastering the prolume action on the weekly chart.

Prolume action helps us understand institutional accumulation / distribution.

This is best done on the weekly chart, not the daily or intraday charts.

There are 2 states of price:

- Up Close

- Down Close

Here is my definition:

- Up Close: Close > Previous Week Close

- Down Close: Close < Previous Week Close

I use the following color combination for price on the weekly chart:

- Up Close: Green Price Bar

- Down Close: Red Price Bar

This is the reason why, the best chart layout for a weekly timeframe is "Bar Chart", not the candlestick chart.

I use a bar chart, without the opening price on the bar. (Exactly the way William O' Neil put it in his book, "How to Make Money in Stocks")

I also ensure that the color of the volume bar mirrors the color of the price bar.

Now we have 4 prolume candles on the chart:

1. High volume red bar

2. High volume green bar

3. Low volume red bar

4. Low volume green bar

Here is the "approximate" behind-the-scenes action of what is going on:

1. High volume red bar: Institutional selling

2. High volume green bar: Institutional buying

3. Low volume red bar: Retail selling

4. Low volume green bar: Retail buying

The reason I use the word "approximate" is:

Sometimes "Low volume green bar" might not necessarily mean retail buying.

It could also mean that,

institutions are accumulating a few shares from the retail participants,

by enticing them,

by offering a higher price,

to kick them out of the stock.

A granular understanding of the prolume action on the weekly chart,

will help you determine,

what the institutions are doing in the stock.

Example:

If majority of candles in the base in an uptrend stock are low volume, it means,

institutions could be accumulating the stock.

If majority of the time, volume remains high on a price rise, it means,

institutional demand for the stock.

Quick Example:

Attached is the weekly timeframe chart of HINDCOPPER

There are 4 red bars in the base.

The base is marked in blue color.

All 4 red bars are on low volume.

That cannot be institutional selling.

I focus on the red bars because,

A red bar on the weekly chart means:

The market spent an entire week in an attempt to ensure the close is below previous week close.

I just want to ensure that, it does not happen on high volume.

Study prolume action in granular detail before taking a trade.

Focus on the weekly chart for institutional activity.

Regards,

Rohit Musale, CFA

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