<s> TRADINGWITHEQUIVOLUME
By
RICHARD W. ARMS, JR.
www.ArmsInsider.com
copyright 2001, Richard W. Arms, Jr.
2
TRADING WITH EQUIVOLUME
Table of Contents
Introduction .........................................................................................3
Technical Analysis...............................................................................7
Equivolume Charting.........................................................................9
Turning Points ...................................................................................14
Buying the Breakouts .......................................................................19
Buying Continuation Patterns........................................................22
When to Sell .......................................................................................26
Selling Short .......................................................................................29
Support and Resistance ...................................................................32
Trendlines and Channels.................................................................35
Gaps.....................................................................................................37
Conclusions........................................................................................39
ArmsInsider.com
TRADING WITH EQUIVOLUME
3
INTRODUCTION
YES!
I just sold a stock for $23 that I bought last week for $18.  What a high!  That is the
pleasure of being a trader, being right.  Taking a profit is great, but the money is not as
important as the success.  I think the best trader is the one who only uses the money to
keep score. He treats trading as a challenge.
In the pages that follow we are going to be looking at some unique methods of analysis
that can help to make trading more successful and therefore more fun.  When I say
traders I am thinking primarily of those who buy individual stocks and hold them for a
period of days, or at most a few weeks.  All the examples we look at will be concernedwith that time frame.  That is not to say the methodology is not applicable to other time
frames, it is. But our emphasis will be on short term trading.  If we can think of the mar-
ket movements as consisting of tides, waves and ripples, we are going to be looking at
the waves.  Day traders may want to apply the ideas to the ripples.  Long-term
investors can look at the larger picture and use the methods to take advantage of the
large tidal movements.  In addition, we will not be looking at options trading, just the
underlying stocks.  But anyone wanting to trade options must be able to understand
where the underlying stock appears to be headed.  Every principle in the pages that fol-
low is a tool for the options trader as well.
When  I  first  became  a  retail  stockbroker,  forty  years  ago,  one  of  the  first  admonitions
from the firm was that we were never to equate investing in stock with gambling.  Even
when a client was trading on a short-term basis, it was a no-no to suggest that it was a
form of wagering.  We were well above acting as though we were operating a Las Vegas
casino.  Moreover, it was pointed out, when you put your money on a roulette table or a
horse,  it  either  won  and  made  money  or  it  lost  and  you  lost  all your  money.    With
stocks,  there  was  residual  value.    You  might  sell  at  a  lower  price  than  where  you
bought, but you would get back some of your money.  Therefore, it was investing, not
gambling.  Of course, if you were in a margin account, it might take a lot of it in a hurry.
And if you did not act quickly enough and the market acted unusually, you could get
wiped  out  just  about  as  quickly  as  at  a  blackjack  table.    On  the  other  hand,  the  rightstock  in  the  right  market  was  not  very  different  than  the  right  horse  in  the  Kentucky
Derby.  But still, it was not to be thought of as gambling. 
ArmsInsider.com
4
TRADING WITH EQUIVOLUME
In the pages that follow we are going to put that admonition aside, and realize that our
only  aim  in  the  market  is  to  buy  at  a  lower  price  than  we  sell.    The  desire  is  to  make
money.  The vehicle we will use in trying to make money is stock.  Any stock that goes
up when we are long, or down when we are short, is a good stock.  I often say, when I
am  making  a  speech,  that  it  would  be  a  lot  better  if  stocks  did  not  have  names,  just
numbers.    Then  we  would  not  become  emotionally  attached  to  them.        If  it  was  just
stock 175 instead of Compaq Computer, we would be less likely to make bad decisions
because we “liked” the company.  It is that sort of detached objectivity that we will be
striving  for  in  the  pages  that  follow.    True,  it  is  not  gambling,  in  that  you  are  buying
something of value; ownership in a corporation. But if one is adopting a short-term and
aggressive attitude, that objective is far overshadowed by the fact that it is only a vehi-
cle used to try to make money.  Moreover, we are going to want to be as willing to sellshort  as  we  are  to  buy.    Selling  short  is  certainly  not  designed  to  participate  in
“Corporate America”.  
Understand,  we  are  not  talking  about  the  building  of  a  long-term  portfolio  of  stocks.
That  is  an  entirely  different  approach,  and  has  been  the  basis  of  several  of  my  earlier
books. We are, in the pages that follow, going to be talking about the aggressive buying
and selling of stocks.  We are going to look at the short side as well as the long side of
the  market.    We  are  not  going  to  be  talking  about  “owning  a  piece  of  Corporate
America”, we are going to be talking about buying and selling stocks because we think
the price is going to change in our favor.
But there is another factor that makes it far different than a trip to Vegas.  When we pull
the lever on a slot machine or place a bet on red at the roulette wheel the result is entire-
ly a function of chance.  We have absolutely no control over the outcome.  Intelligence
plays no part beyond that point.  Perhaps we can know the odds well enough to place
our  bets  where  we  have  the  best  chance  of  winning,  but  we  cannot  play  any  part  in
where  the  ball  drops  in  the  slot  or  how  the  wheels  turn  in  the  machine.    In  the  stock
market we can be rewarded for being smart.  We can make good decisions and swing
the odds in our favor.  
In addition, at the casino the house always wins.  The odds are such that in the long runthe gamblers are always the losers.  It is not even a zero-sum situation.  It is an automat-
ic losing position, on average.  In the market, if stocks are in a long-term advance, the
buyers can all be winners, on average.  In bear markets all the short sellers can be win-
ners.    Of  course,  there  is  still  a  cost  of  buying  and  selling,  which  puts  a  part  of  every
ArmsInsider.com
TRADING WITH EQUIVOLUME
5
investment  in  the  pocket  of  a  broker.    But  it  is  not  the  handicap  it  once  was.
Commissions are now so low as to be of little concern.  In a sideways market it is not
quite a zero-sum game, but it is close to it.
As we go along we will be looking at a methodology that is designed to swing the odds
in our favor.  We will be combining price and volume into usable information.  It is a
methodology  that  helps  to  shield  us  from  irrational  emotional  decisions.    We  will  be
concerned with the emotionalism of others, and attempting to recognize times when a
swing in emotions is presenting an opportunity to make money.  The interplay of price
and volume will help to tell us what others are doing, and allow us to take advantage
of that knowledge.
Interestingly,  all  of  the  methodology  we  will  consider  in  the  pages  that  follow  have
their place in conservative long-term investing also.  In fact, my prior books have con-
centrated on that aspect of the market. We are going to be talking about the delicate bal-
ance between fear and greed that moves prices, and those forces are in control on the
long term as well as the short term.  For the purposes of this write-up our time frame
will be days and weeks, but the same methods are effective as we move up or down the
time scale.  An Equivolume chart that is posted minute by minute during a trading day
contains all the same characteristics as a chart posted on a daily or a weekly basis.  We
will be studying moves that develop over a few days, because that is also the focus of
my website, ArmsInsider.com, which offers stock recommendations and is an adjunct to
this  book.   A trader  who  wants  to  follow  and  use  our  recommendations  needs  to  be
familiar with the reasoning that leads to those suggestions.
We  are  living  in  a  wonderful  era  for  investors.    Technology  has  made  it  possible,  as
never before, for a diligent trader to be successful.  With the speed of computers and of
communications, everyone has an opportunity to participate on equal footing.  When I
first invented the Arms Index (some people still call it TRIN) in 1967, I had to calculate
it on a slide rule.  Now it is calculated for me second by second and appears on almost
every quotation device.  It crosses the tape every few minutes on CNBC.  When I first
developed Equivolume charting, every chart had to be drawn by hand.  Now there are
computer  programs  that  do  it  all,  and  do  it  well.    I  am  able  to  follow  thousands  ofstocks  on  a  daily  basis,  searching  for  opportunities.    Thirty  years  ago  I  hand-drew
charts of a few dozen stocks, and when they went off the top or bottom of the page I
had to start over.  When the volume characteristics changed I had to rescale them and
throw the old charts away.  Today the computer recalculates and rescales the charts so
ArmsInsider.com
6
TRADING WITH EQUIVOLUME
they always fit the page.  Facts, rumors, advice and opinions flash across the screen on
the Internet.  Geography has become meaningless to the trader. Moreover, the intense
competition  of  the  marketplace  has  brought  commission  rates  down  so  low  that  they
are close to negligible.  The trader no longer needs to be concerned with the transaction
costs.  If a stock is not acting right it can be sold and replaced instantly and almost with-
out  cost.    What  used  to  take  a  number  of  phone  calls  to  a  broker,  wires  to  New York,
calls  back  with  confirmations  and  waiting  days  for  balances,  are  all  now  activated  by
the  click  of  a  mouse  button.    The  trading  mechanics  have  become  so  efficient  that  no
one need be disadvantaged because of geography or cost.  
Now,  with  decimalization,  spreads  have  contracted  even  further.    There  are  now  100
possible steps in single point of range, instead of just eight a few years ago.  
All this is good, in that the small trader is on an even footing with the big trader.  It is
also a curse, though.  There is so much information, and so many rumors, and so many
opinions,  that  it  can  lead  to  confusion  and  indecision.    Modern  communications  have
led  to  an  overload  of  data.    We  will,  in  the  pages  that  follow,  try  to  cut  through  that
morass, and concentrate on the few factors that can lead to extraordinary profits.  
ArmsInsider.com
TRADING WITH EQUIVOLUME
7
TECHNICAL ANALYSIS
This book is about technical analysis.  Moreover, it is about one particular type of tech-
nical  analysis.   You  will  not  see  anything  about  earnings,  or  dividends  or  cash  flows.
Nowhere will we mention management or products or competition or sales.  Search all
you  want  but  you  won’t  find  another  mention  of  price  to  earnings  ratios.   All  we  are
going to be concerned with is price and volume.  We are going to look at the past, and
try to anticipate the future, and we are going to do so without ever looking at a single
fundamental factor.  
This  is  not  because  of  laziness;  it  is  because  of  our  need  to  be  realistic  and  objective.
The stock market determines the price of a stock, and the volume of the trading repre-sents the amount of interest in that determination.  That determination is based upon
all the factors mentioned above; the fundamental factors I will not repeat because I said
you would not ever see them again in this book.  But the fundamentals do not directly
determine price.  First they have to be passed through a very critical filter, which is the
emotionalism of the marketplace.  The fundamentals are only as important or unimpor-
tant as the emphasis placed on them by the millions of minds studying them.  We have
all seen a stock go down on a good piece of news or up on news that looks terrible, and
we  have  shaken  our  heads  in  disbelief.    That  was  because  we  were  trying  to  predict
what  other  people  would  think  of  that  news.    But  the  market  is  never  wrong.    It  is
reflecting exactly what the consensus really is.  The market is a very efficient and accu-
rate reflection of the facts, but only after they have been analyzed and then reacted to in
an  emotional  manner.    In  the  final  analysis,  the  price  of  a  stock  and  its  volume  are  a
reflection of a delicate balance between fear and greed.  That balance is influenced by
the underlying fundamentals, but is not a direct representation of those fundamentals.
In  using  technical  analysis  we  are  deciding  to  study  the  output  of  those  emotional
responses,  rather  than  try  to  second-guess  what  they  may  be,  based  on  our  limited
knowledge of the “facts”.  When we look at price and volume, we are looking at all the
facts; they have been interpreted for us, and translated into fear or greed.  It is not lazi-
ness  that  keeps  a  technician  from  looking  at  the  fundamental  data,  is  the  knowledge
that everything that is known about a stock has been already taken into account, and itis publicly available in the form or the price of the stock and the amount of stock that is
changing hands.
ArmsInsider.com
8
TRADING WITH EQUIVOLUME
The  way  in  which  the  methods  that  follow  are  different  than  other  technical  analysis
methods  is  the  great  dependence  upon,  and  emphasis  of,  volume.    It  is,  I  believe,  of
paramount  importance,  yet  it  is  often  ignored.    Many  traders  do  not  even  follow  the
number  of  shares  being  traded,  relying  wholly  upon  price  movement  to  make  their
decisions.  Yet, without knowing the volume one has no idea of how much conviction is
involved in a move.  It is like buying a car without looking under the hood.  One needs
to know if that car has enough power to get over the hills.  It can have a beautiful paint
job,  wonderful  upholstery,  great  tires,  but  it  is  useless  if  it  doesn’t  have  an  adequate
motor.  Volume is the motor of the marketplace.  We are going to be looking under the
hood of each stock we trade, and seeing whether the power is there or not.  To do that
we are going to use my unique charting method called Equivolume.
ArmsInsider.com
TRADING WITH EQUIVOLUME
9
EQUIVOLUME CHARTING
Shown below is the type of chart we are all familiar with; a bar chart.  In this case each
vertical line represents one day of trading.  The top of the line represents the high of the
day and the bottom of the line represents the low of the day.  The little horizontal line is
the level at which the stock closed on that day.   
American Express (80.44, 80.75, 78.38, 79.06)
93
92
91
90
89
88
87
86
85
84
83
82
81
80
79
78
77
76
75
74
73
72
71
25000
20000
15000
10000
5000
27
3November
10
17
24
1December
8
15
22
29
51998
12
20
26
2February
9
Across  the  bottom  of  the  chart  is  a  histogram  that  represents  the  volume.  By  tracing
upward we can equate the volume for each day with the price action on the same day,
but it is difficult to know precisely which volume applies to which price in every case.  
When I first thought of Equivolume as an alternative to bar charts I had already become
aware of the importance of volume.   I knew that it was necessary to see whether vol-
ume was heavy or light as a stock moved through an old level of resistance or support.
I  knew  that  volume  tended  to  become  heavy,  and  price  spread  tended  to  shrink,  at
important  tops.    I  had  become  aware  that  large  price  swings  on  heavy  volume  were
typical of climactic bottoms.  I was intensely aware of volume, because it was volume
that was at the foundation of my, by then already popular, Arms Index.  It bothered methat  volume  tended  to  be  relegated  to  a  secondary  significance,  or  even  completely
ignored at times.  I felt that volume needed to be made a full partner with price if one
was to understand the underlying dynamics of price movement.
ArmsInsider.com
10
TRADING WITH EQUIVOLUME
When it came to me, driving home one afternoon, it was absurdly simple.  All that was
necessary was to combine the two pieces of information into a single posting.  I would
move volume off the lower margin of the chart and incorporate it in the price posting.
Each day would appear as a rectangle, with the width being the volume.  The top of the
box, as with a bar chart, would be the high of the day, and the bottom of the box would
be  the  low  of  the  day.   All  I  would  be  doing  would  be  spreading  each  bar  chart  line
sideways  into  a  rectangle,  as  a  function  of  the  number  of  shares  traded.    The  results
were fantastic!  Each posting started to give a much more complete picture of the trad-
ing.  I found that each box was giving a concise picture of supply and demand for that
stock  on  that  day.      Shown  below  is  an  Equivolume  chart  of  the  same  stock  over  the
same period we were looking at above.
American Express (80.44, 80.75, 78.38, 79.06)
f
h
i
g
j
c
e
d
b
a
93.092.592.091.591.090.590.089.589.088.588.087.587.086.586.085.585.084.584.083.583.082.582.081.581.080.580.079.579.078.578.077.577.076.576.075.575.074.574.073.573.072.572.071.571.070.5
27
3November
10
17
24
1December
8
15
22
29
51998
12
20
26
2February
The first thing that becomes immediately apparent on this chart is that all days are not
the same.  Compare the box marked “a” with the box market “b”.   Each represents a
single  day  of  trading  but  one  is  tall  and  wide  while  the  other  is  short  and  narrow.
Obviously, “a” was a very significant day.  There was a wide trading range and heavy
volume.  Box “b” was a far less meaningful day.  Volume was light and there was not
much price movement.   Box “h” was short but fairly wide, indicating volume but lackof price movement.  It was suggesting the stock was encountering resistance after the
light volume rally.  Box “i” was tall, but on good volume, and was saying that the stock 
ArmsInsider.com
TRADING WITH EQUIVOLUME
11
was moving downward with vigor.  The shape and size of each box has a story to tell.
Let us go through all the indicated boxes on this chart, and see what they were telling
us.
a. A heavy  volume  reversal  day.    This  looked  like  the  culmination  of  the  decline.
Heavy volume and a wide spread are typical of the final washout of a drop.
b. A light volume rally off the low.  The lack of volume makes it far from convincing.
c. Here we are seeing a rally with better volume.  It suggests that the low was tested,
and that the rally might carry further.  
d. Notice the very light volume on this pullback.  It now looks as though volume is
coming in on the upside and drying up on the downside.  That is a very bullish
sign.  
e. On the next day volume explodes to the upside, penetrating the resistance we saw
at “b” and saying the stock is headed higher.
f. After a big advance over the prior two weeks volume remains heavy but the range
contracts.  Perhaps the stock is encountering resistance after such a sudden rise.
g. This is ominous.  Heavy volume to the downside and a wide trading range.  If we
were to insert a trendline along the bottoms of the rise, this drop would penetrate
it.  But the narrowness of the top suggests it is not likely to go lower until some
attempt to rally is made.
h. The stock rallies, but the move lacks volume.  It looks like a lighter volume test of
the heavy volume top at “f”.  
i. The decline resumes, on heavier volume, and support is penetrated decisively.
j. The decline continues.
This is a fairly typical Equivolume chart, posted on a daily basis.  By going to weekly
postings or three-day postings a longer-term outlook can be achieved.  Very aggressive
intraday traders might go to hourly charts or even five-minute charts.  On our website,
all of the Equivolume charts are daily, with the aim of taking advantage of price moves
lasting a few days or, at most, weeks.  But in any time frame, the signals given by the
price  to  volume  relationship  are  similar.    On  longer-term  charts  they  tend  to  be  more
muted and on very short-term postings they tend to be more erratic.  But the rules are
the same.  The shape of each box and its size tells us how easy or hard it is for price to
move in a given direction.
There are other tools that are used as well.  The chart below has the appearance of the
typical chart published on our website.  On it you will see a number of other lines that
need some explanation.  But first look at the boxes on this stock, as we did on the prior
ArmsInsider.com
12
TRADING WITH EQUIVOLUME
example.  Notice particularly the two boxes at the low.  They are very wide and short.
They denote extremely heavy volume in a narrow trading range, and indicate a strong
level of support.
Ease of Movement (0.5472), Ease of Movement (0.2019)
ADV TISSUE SCI (5.500, 4.375, 5.125)
0.60.50.40.30.20.10.0-0.1-0.2-0.3-0.4-0.5-0.6-0.7-0.8
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
25
9
2October
16
23
30
6November
13
20
27
4
11
18
26
December
22001
8
16
22
29
Febr
Followed by the two up boxes that are tall for their width, but still are on fairly heavy
volume, we have a signal the stock is turning up, and it is time to buy.  Notice also the
last posting on the chart.  The stock has moved through an old area of resistance with
increasing volume and a widening range.  That is a very bullish signal.  As we will see a
little later, a light volume pullback is likely before going higher.  Often we will look for
that pullback before buying.
Superimposed  on  the  Equivolume  postings  are  two  lines,  one  red  and  the  other  blue.
They are moving average lines, but not the usual moving average lines of Wall Street.
Instead of being based on time they are based on volume. That is, heavier volume days
contribute more to the moving average than do light volume days.  A complete discus-
sion of Volume Adjusted moving averages is beyond the scope of this presentation.  I
would suggest anyone interested in the derivation of these lines read my book entitled
“Trading  Without  Fear”.    For  the  purposes  of  understanding  the  information  on  thecharts, notice that the two lines tend to cross at or near important buy and sell points.
Because they are volume adjusted they tend to be more sensitive to the heavy volume
of tops and bottoms, and give earlier signals than do the usual time-based moving aver-
ages.  The hand calculation of these lines is an immense job, but with today’s computers
ArmsInsider.com
TRADING WITH EQUIVOLUME
13
and sophisticated programs, we can easily use them without worrying too much about
how they are derived.
Across the top of the chart are seen another pair of lines.  They too involve a difficult set
of calculations, but are nothing to a computer.  They represent two values for the Ease
of Movement.  Ease of Movement is a method of valuing each of the Equivolume boxes
numerically, taking into consideration the size and shape of each box and the direction
and extent of the daily price change.  It is an attempt to ascertain whether it is easier for
the stock to move up or down at any given time. As with the Volume Adjusted moving
averages, we look at the crossover of the two lines as a clue to future price direction.  A
complete  discussion  of  Ease  of  Movement  is  available  in  my  book  entitled  “Volume
Cycles in the Stock Market”.  These, and my book entitled “The Arms Index”, are avail-able for purchase at our website bookstore, or through most book dealers.
Obviously, these charts represent a sophisticated set of computer programs.  In the early
days I drew charts by hand, and did the complex calculations of Ease of Movement and
Volume Adjusted moving averages with a hand calculator.  Today there is no need for that.
All the charts in this book were produced using the Metastock program marketed by Equis
International.  (http://www.equis.com/metastock/windows95nt/)    Tell  them  you  are
interested as a result of talking to Dick Arms and you get a discount.  As an ArmsInsider
subscriber, you may want to have this program in order to follow up on suggestions after
the original recommendation has been made.
ArmsInsider.com
14
TRADING WITH EQUIVOLUME
TURNING POINTS
Tops and bottoms are not for buying or selling, they are for covering long or short posi-
tions.  A possible top is an unconfirmed move, and trying to short a stock on that basis
is too risky.  But it is a time to take a profit.  Similarly, something that looks like a bot-
tom is a good time to get out of a short position, but the risks are far too high to use it as
a  buy  point.    We  will  look  first  at  Equivolume  signals  that  suggest  tops  and  bottoms
because  they  are  the  most  obvious  boxes  on  an  Equivolume  chart,  usually.    Later  we
will look at the signals that are going to be our buying or shorting points.  
When a stock gets to a top, it usually tells us so.  Volume becomes heavy, and the price
refuses to move.  That produces an Equivolume box, or a series of Equivolume boxes,that are very wide for their height.  You will often see them referred to as “oversquare”
boxes.
Ease of Movement (-0.1338), Ease of Movement (-0.3632)
ALBERTO CULVER (39.00, 39.00, 37.75, 38.50)
square
oversquare
76543210-1-2-3-4-5
44.0
43.5
43.0
42.5
42.0
41.5
41.0
40.5
40.0
39.5
39.0
38.5
38.0
37.5
37.0
36.5
36.0
35.5
35.0
34.5
34.0
33.5
33.0
13
20
27
4
11
18
26
December
22001
8
16
22
29
Februa
On  the  chart  above  we  see  a  number  of  instances  in  which