Equivolume displays prices in a manner that emphasizes the relationship between price and volume. Equivolume was developed by Richard W. Arms, Jr., and is further explained in his book Volume Cycles in the Stock Market.
Instead of displaying volume as an “afterthought” on the lower margin of a chart, Equivolume combines price and volume 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–it represents the volume for the period.
This figure shows the components of an Equivolume box:
The bottom scale on an Equivolume chart is based on volume, rather than on dates. This suggests that volume, rather than time, is the guiding influence of price change. To quote Mr. Arms, “If the market wore a wristwatch, it would be divided into shares, not hours.”
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 (heavy volume accompanied with small changes in price) tend to occur at turning points, while tall and narrow boxes (light volume accompanied with large changes in price) are more likely to occur in established trends.
Especially important are boxes which penetrate support or resistance levels, since volume confirms penetrations. A “power box” is one in which both height and width increase substantially. Power boxes provide excellent confirmation to a breakout. A narrow box, due to light volume, puts the validity of a breakout in question.
The following Equivolume chart shows Phillip Morris’ prices.
Note the price consolidation from June to September with resistance around $51.50. The strong move above $51.50 in October produced a power box validating the breakout.
The following is a Candlevolume chart of the British Pound.
You can see that this hybrid chart is similar to a candlestick chart, but the width of the bars vary based on volume.
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.
Equivolume 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.”
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.
Founder of the TRIN
Richard W Arms, Jr., is a financial consultant to institutional investors and a private portfolio manager based in Albuquerque, New Mexico. He is a noted expert in the field of technical and market analysis, the 1995 winner of the prestigious Market Technicians Award and the author of several best selling books and articles on his ground breaking theories in volume analysis and market forecasting. This key technical tool for understanding market price movement is listed daily in the Wall Street Journal and is flashed once a minute on CNBC.
Richard Arms’ revolutionary theories have changed the way investors perceive the market. His expertise in the field of technical analysis has had significant impact, evidence of this fact is his Equivolume charting system is now part of the most popular stock and futures software, and his Arms Index – also known as the Short-Term Trading Index or TRIN – has become one of the most important technical tools of Wall Street.