Traders are very alert to price action as it relates to time. Trends, wave theory, cycle studies and other conventional technical analysis all function in that context. The actual distribution of price unrelated to time is another way of looking at the markets and can be a useful trading tool.
When linear information is plotted, randomly and unrelated to time, it usually forms a distribution curve. The most common is the "bell curve." It looks simple and is intuitively logical.
Stock prices, however, are non-linear. By that I mean they are very complex and dependent on the interaction of varying inputs. There have been attempts to simplify complex financial systems into linear terms and they work well for static periods inside the complex system.
This was the case, initially, with the Black-Sholes model that eventually brought us the Long Term Capital Management failure and the "Gaussian Copula" formula that was responsible for the most recent economic meltdown. It is still useful to look at the distribution of stock price and keep the analysis simple.
The Volume by Price Indicator is a horizontal histogram that shows activity at a certain price level unrelated to time. It is used, most commonly, to identify areas of support and resistance.
The chart below is a 20-year chart of the Dow and the channel outlined in blue is the area where price was most heavily distributed as indicated by the long histogram bar. (The dashed red lines measure a similar price fluctuation above and below the zone and are just coincidental observations.) The most recent action has price reentering the "popular" distribution range.
This move, on its own, would not appear to be significant. We know that price action is more heavily distributed in this range but, we also know, it is non-linear and random in nature.
It is important to remember, however, that, very often, underlying complex systems are simple and elegant symmetries. Technical analysis does not attempt to quantify hidden symmetry but to identify its shadow as it passes over price.
The trader's dilemma is to seize an "esoteric" moment and turn a "real" profit. It is important to approach the problem from every angle. The Volume by Price Indicator discards the time variable from the analytical equation and observes volume in a different context. It is different tool in a self-similar toolbox.
Robert Moreno is a former member of the New York Cotton Exchange and the New York Board of Trade. He has traded for his own account for over 25 years. An experienced market technician and student of the art since the days of paper charts and manual computation, he authored a daily technical analysis information sheet popular with brokers and traders in the "pits." Currently, he is a General Partner at Wyckoff Investment Partners, LLC, which provides technical and fundamental research and analysis to traders and investors.