[VSA] Volume Spread Analysis Part II

[Bearbull 10]

AND WHY SHOULD HE?

Would you do it if you could regularly pull in 4-6 in your class each paying 5k+ & 1k for ongoing 90min sessions.

Wellcome to the world of magic and illusion:)

[Eiger 10]

I thought today was a pretty interesting, sometimes a little difficult to figure out, though.

 

I have a VSA question for the experts. Maybe you can help. I attached a chart of this morning's session in the ES (5-min). The second bar this AM (Bar A on the attached chart) had 80,000 contracts on it. That is ultra high volume for a 5-min bar, even off the open. The bar was fairly wide spread and closed on it's lows on the heavy volume. I read this as supply. The next bar was a level bar. Then, two bars later on Bar B, price dipped lower and reversed closing on its highs. Volume was less than the previous two bars, and B bounced off of the last top at the area I labled as 1.

 

I didn't buy this test, as i was concerned about what I thought was supply on A. Was I reading A as supply correctly, or am i missing something? Is this one of those instances where the market suddenly becomes bullish at B? This drove me nuts all morning

Thanks for the help,

Eiger.

[DbPhoenix 42]

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During the first 25 minutes, the bars that illustrate the greatest amount of trading activity are generally related to positive or neutral price bars. The waves of buying and selling can be more accurately linked to price action by using an even smaller interval.

 

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[dandxg 10]

I thought today was a pretty interesting, sometimes a little difficult to figure out, though.

 

I have a VSA question for the experts. Maybe you can help. I attached a chart of this morning's session in the ES (5-min). The second bar this AM (Bar A on the attached chart) had 80,000 contracts on it. That is ultra high volume for a 5-min bar, even off the open. The bar was fairly wide spread and closed on it's lows on the heavy volume. I read this as supply. The next bar was a level bar. Then, two bars later on Bar B, price dipped lower and reversed closing on its highs. Volume was less than the previous two bars, and B bounced off of the last top at the area I labled as 1.

 

I didn't buy this test, as i was concerned about what I thought was supply on A. Was I reading A as supply correctly, or am i missing something? Is this one of those instances where the market suddenly becomes bullish at B? This drove me nuts all morning

Thanks for the help,

Eiger.

 

Eiger, I am no expert, but decent so I will chime in if that's ok. I think your read is spot on. If I was going to buy a B, which is no supply or a test, I would do so with an expectation that the high of A will be retested. As I approach the high of A which is also your upper trend channel another supply line I would be watching the momentum on the tape to see if you are going to punch through or bounce off like it did.

 

Now if I could ask you a question? If you bought at B would you a breakout of the high with a stop below the low of bar B or would you buy at close. I have been experimenting with both and just trying to get some opinions if it's not to personal?

 

BTW I like your example of using trend channels with VSA/PV. I still have difficulty with combining the two. If my read is correct B and D are no supply tests which is a good sign for your uptrend channel and should give one confidence on a possible target and expectation. I vaguely recall Sebastion pointing out in one of the customer events that when approaching the supply line in an uptrend you want to see UT's and ND's off the supply line to see that it's respected which is what you appear to have at A and A1.

 

Maybe this is one where using $tick or $ticki would assist?

[dandxg 10]

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During the first 25 minutes, the bars that illustrate the greatest amount of trading activity are generally related to positive or neutral price bars. The waves of buying and selling can be more accurately linked to price action by using an even smaller interval.

 

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DB, is this 25 minutes a general rule to be used on a daily basis? How does it differ on days when big reports come out before RTH, like NFP and such? Thanks

[DbPhoenix 42]

DB, is this 25 minutes a general rule to be used on a daily basis? How does it differ on days when big reports come out before RTH, like NFP and such? Thanks

 

No, that's the timeframe that Eiger was asking about. One can go on for as long as the wave lasts, but the focus must be on the flow and not on bars and closes in order to interpret the balance between buying pressure and selling pressure at any giiven segment.

 

For further info, check the "Dailies" posted to my Blog.

 

Edit: I should point out again that the keys are support and resistance. Without that, one can easily get lost in the trees and end up being tossed around like the ball in a game of KeepAway. Keep your eye on the prize.

Edited March 17, 2008 by DbPhoenix

[CandleWhisperer 10]

I thought today was a pretty interesting, sometimes a little difficult to figure out, though.

 

I have a VSA question for the experts. Maybe you can help. I attached a chart of this morning's session in the ES (5-min). The second bar this AM (Bar A on the attached chart) had 80,000 contracts on it. That is ultra high volume for a 5-min bar, even off the open. The bar was fairly wide spread and closed on it's lows on the heavy volume. I read this as supply. The next bar was a level bar. Then, two bars later on Bar B, price dipped lower and reversed closing on its highs. Volume was less than the previous two bars, and B bounced off of the last top at the area I labled as 1.

 

I didn't buy this test, as i was concerned about what I thought was supply on A. Was I reading A as supply correctly, or am i missing something? Is this one of those instances where the market suddenly becomes bullish at B? This drove me nuts all morning

Thanks for the help,

Eiger.

 

 

Just a couple of things to note:

 

[habi 10]

Hi Eiger

 

Just my opinion: The first bar was a strong up bar, closing on its high, followed by a weak bar on higher volume. If you have a look on a 1 minute chart, it looks not that bad. After the open, all green up bars close nearly their high. Weaknees came in on bar 1 with the highest volume since the open. The second down bar after 1 closed already in the middle, followed by a long up bar.

Bar 2 then was on very high volume, but closing off of its low, followed by two lower volume down bars and an inverted hammer on increasing volume.

 

I don't know, if you would find a tradable setup here, but it looks all stronger than in the 5 min chart imho. It's not the first time, that I see weakness in one time frame and strenght in another.

 

A question to you. Was the 1:20 bar a spring? We had high volume at the open on up bars, it was not a selling climax in this case, but we had a huge gap down in the regular session.

[Eiger 10]

Eiger, I am no expert, but decent so I will chime in if that's ok. I think your read is spot on. If I was going to buy a B, which is no supply or a test, I would do so with an expectation that the high of A will be retested. As I approach the high of A which is also your upper trend channel another supply line I would be watching the momentum on the tape to see if you are going to punch through or bounce off like it did.

 

Now if I could ask you a question? If you bought at B would you a breakout of the high with a stop below the low of bar B or would you buy at close. I have been experimenting with both and just trying to get some opinions if it's not to personal?

 

BTW I like your example of using trend channels with VSA/PV. I still have difficulty with combining the two. If my read is correct B and D are no supply tests which is a good sign for your uptrend channel and should give one confidence on a possible target and expectation. I vaguely recall Sebastion pointing out in one of the customer events that when approaching the supply line in an uptrend you want to see UT's and ND's off the supply line to see that it's respected which is what you appear to have at A and A1.

 

Maybe this is one where using $tick or $ticki would assist?

 

Thanks, Dan. I would have bought B on the close with a stop just below (though I didn't take it because i was perplexed with A). It was a reversal bar and closed well into the preceding bar after dipping down underneath it. That's a pretty strong bar in general and shouldn't come back on you. Sometimes, the next bar will retrace a little into the reversal bar, but sometimes it just takes off, so I just take them on the close.

 

These trend channels shifted a few times during the run up. I first drew a demand line from B and the small swing low preceding B, with a parallel from A. That was OK for taking C, but made A1 look quite weak. It wasn't until D was in place that these trend lines were drawn. You could also have drawn reverse trend lines off A and A1 just as effectively. I thought they highlighted the top at E1/E2 pretty well.

 

I think you heard Sebastian correctly. The trend lines are support and resistance. Tom Williams talks about this in his book. You do want to see No Demand and UpThrusts occur along the lines, and also see volume recede.

[Eiger 10]

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During the first 25 minutes, the bars that illustrate the greatest amount of trading activity are generally related to positive or neutral price bars. The waves of buying and selling can be more accurately linked to price action by using an even smaller interval.

 

.

 

.

 

Thanks, Db. That's a good use of the 1-minute chart. I tend to stay way from it because I begin see way too many "set-ups" that then evaporate. But I see your point about this. Thanks

[Eiger 10]

Hi Eiger

 

Was the 1:20 bar a spring? We had high volume at the open on up bars, it was not a selling climax in this case, but we had a huge gap down in the regular session.

 

I'm not quite sure what bars you are talking about. There was a nice Spring today (Bar L) on the 1:25 PM bar (Eastern Time). A nice dip down with a very good close. Lot's of volume though, so it got tested. You can see how the Secondary Test (Bar M) came back into the high volume area at L. The ST was the place to go long.

 

Eiger

[DbPhoenix 42]

Thanks, Db. That's a good use of the 1-minute chart. I tend to stay way from it because I begin see way too many "set-ups" that then evaporate. But I see your point about this. Thanks

 

Actually, the setups are identical. The only difference is whether one wants to trade according to the clock or to the balance between demand and supply at key levels.

[dandxg 10]

Actually, the setups are identical. The only difference is whether one wants to trade according to the clock or to the balance between demand and supply at key levels.

 

I am glad you are constantly reminding folks to find and use S/R areas they like and work from there. It makes things much easier. I just sit and wait and watch PV as it approaches S/R. Before I was always trying to determine is this distribution/accumulation. It makes trading much more relaxed.

[habi 10]

I'm not quite sure what bars you are talking about. There was a nice Spring today (Bar L) on the 1:25 PM bar (Eastern Time). A nice dip down with a very good close. Lot's of volume though, so it got tested. You can see how the Secondary Test (Bar M) came back into the high volume area at L. The ST was the place to go long.

 

Eiger

 

Yes, I was talking about bar L in your chart, but I have drawn the line from the 9:30 am bar. If I move the cursor over a bar, eSignal shows the open time, Metastock the closing time, thats where we have the difference.

 

I thought, that we need a selling climax to the left to be a valid spring. At the open, we had much volume, but on up bars. J was just a small selling climax. Even so, bar J looks very significant with this volume spike, closing high and on support from the opening. Yes, M was a nice test and looks even better in a 3 min chart.

habi

[Bearbull 10]

I am glad you are constantly reminding folks to find and use S/R areas they like and work from there. It makes things much easier. I just sit and wait and watch PV as it approaches S/R. Before I was always trying to determine is this distribution/accumulation. It makes trading much more relaxed.

Looks like you are beginning to see the light. Focussing on individual bars which is what most do with VSA, not through their own fault, at TG you have the statements like "markets do not like upbars on high vol etc" repeated so many times without reference to context it can be very misleading. Now watch the video post 456 by Sebastian of his buddy, upbar on high vol right at the previous swing high resistance, note the comments,

"The market wants to go up" 2 opposing views.

Yesterday we had a huge gap down on all indices, strength came in at the outset (remembering that the pros. have info. on all orders in the cash market and place themselves accordingly in the futures), rapid mark up in price, public also tend to join in, the pros are aware of that, they take their profits and also drive the prices down sharply to shake off the longs, hence that upthrust after 7-8min from the open, clearly visible on the 1min illustrated by Dbphoenix. Selling then dwindles off in preparation for further mark up, i.e buying and selling waves, pure Wyckoff.

Taken in isolation the 2nd bar would like like upthrust and a weak signal but it is in the wrong place, we have strength in background, not weakness;)

[Eiger 10]

I thought, that we need a selling climax to the left to be a valid spring. habi

 

Not necessarilly. A SC is very nice background, but not a defining characteristic of Springs. They come in many flavors. In this example, note the rally before the Spring - potential strength. The Spring itself had stopping volume on it, and was climactic action - more strength. You also had near support and, as you pointed out, the first bar of the AM session as some support. I would view the near support as more important, though. There were two swing lows just prior to the open that also could have been tested by the spring. These aren't shown on your chart. Then, a test confirming that supply seen at L has dried up.

 

Eiger

[mister ed 10]

Thanks, Db. That's a good use of the 1-minute chart. I tend to stay way from it because I begin see way too many "set-ups" that then evaporate. But I see your point about this. Thanks

 

Really valuable point thanks Eiger, fully agree. If I can elaborate a little as some reading this thread, especially less experienced traders, may not fully appreciate your point and be left with an incorrect understanding. If I am wrong in my interpretation of your point, apologies.

 

A bar on a 1-minute chart will have, on average, a much smaller range than a bar on a 5-minute chart, the 1-minute bar will also have, on average, much less volume than the volume on a 5-minute bar. Sorry to state the glaringly obvious, but...

 

So, a set-up on a 1-minute bar chart that may, on appearance, look like the same set-up on a 5-minute chart, will have a much smaller expected price move from that set-up. Moves occur on different scales, again, sorry for stating the glaringly obvious. A trader looking for say a 5 point move off a set-up on a 5-minute bar may well be disappointed with perhaps only a 5 tic move from what appears to be the same looking set-up on a 1-minute bar chart. This is the sense in which I understand your important point that the set-up evaporates…very significant, thanks.

[Eiger 10]

Hi Ed,

I personally found that I got whipsawed quite a bit trying to trade off that small of a time frame. Sometimes it is helpful, as in Db's recent post. There you see the demand, where on the 5-min chart it looked like supply. Most of the time for me, however, the 1-min chart appears better than it is. It took a long time for my mentor to convince me that the 1-min was too ephemeral (I was very stubborn ). I kept thinking that the finer time frame let me "see" more and give me better entries and exits. But I finally learned that, for me and my trading, a higher time frame is much better. Others may have a different experience, and that's great.

 

Eiger

[DbPhoenix 42]

Really valuable point thanks Eiger, fully agree. If I can elaborate a little as some reading this thread, especially less experienced traders, may not fully appreciate your point and be left with an incorrect understanding. If I am wrong in my interpretation of your point, apologies.

 

A bar on a 1-minute chart will have, on average, a much smaller range than a bar on a 5-minute chart, the 1-minute bar will also have, on average, much less volume than the volume on a 5-minute bar. Sorry to state the glaringly obvious, but...

 

So, a set-up on a 1-minute bar chart that may, on appearance, look like the same set-up on a 5-minute chart, will have a much smaller expected price move from that set-up. Moves occur on different scales, again, sorry for stating the glaringly obvious. A trader looking for say a 5 point move off a set-up on a 5-minute bar may well be disappointed with perhaps only a 5 tic move from what appears to be the same looking set-up on a 1-minute bar chart. This is the sense in which I understand your important point that the set-up evaporates…very significant, thanks.

 

This is a common misunderstanding, that because the "bars" on a smaller interval chart are shorter and the volume is by definition less that the targets are nearer. The targets, however, remain exactly the same. One buys support and sells resistance. The chief difference is that one is buying support at support and not waiting five minutes or fifteen minutes or an hour to do so.

 

If one can't read the signals, it's most likely because he's trained himself to focus on bars rather than on price movement. If he also views every aggressive move in either direction as a potential trap, he will find himself reduced to perpetual inaction.

[mister ed 10]

A common misunderstanding is that there is a 'one-size-fits-all' approach to support and resistance. S&R is present at different scales to diferent degrees, and there are traders trading at these different scales. If one cannot read the signals at these different scales, thats fine, stick to the 10-point or so fixed 'zones' of S & R, but for those more attuned to the dynamic nature of S&R, and who can trade dynamically, recogntion of the different scales within which the market trades is important. It is easy to get fixated on one scale and assume that is the only scale of relevance. It is a subtle distinction, though, not everyone gets it.

[DbPhoenix 42]

A common misunderstanding is that there is a 'one-size-fits-all' approach to support and resistance. S&R is present at different scales to diferent degrees, and there are traders trading at these different scales. If one cannot read the signals at these different scales, thats fine, stick to the 10-point or so fixed 'zones' of S & R, but for those more attuned to the dynamic nature of S&R, and who can trade dynamically, recogntion of the different scales within which the market trades is important. It is easy to get fixated on one scale and assume that is the only scale of relevance. It is a subtle distinction, though, not everyone gets it.

 

This common misunderstanding arises from an equally common misunderstanding as to the nature of support and resistance. There are "support" and "resistance" in every tiny swing on a tick chart, but one is not required to trade that just because he happens to use a tick chart to follow price action.

 

Yesterday, for example, support was at 1675. Resistance was at 1710. That's what the trader trades, regardless of what bar interval he's using to monitor price action, if he's using any bar interval at all.

Edited March 18, 2008 by DbPhoenix

[mister ed 10]

There are "support" and "resistance" in every tiny swing on a tick chart, but one is not required to trade that just because he happens to use a tick chart to follow price action.

 

Agreed, no requirement for that at all. And one would do well to be aware that these small S & R forming will not necessarily translate into the grand poobah of trades .... different scales, different 'targets' (for want of a better word).

Edited March 18, 2008 by mister ed

[DbPhoenix 42]

Agreed, no requirement for that at all. And one would do well to be aware that these small S & R forming will not necessarily translate into the grand poobah of trades .... different scales, different 'targets' (for want of a better word).

 

The "smaller" S&R don't translate into anything. They are merely components of the waves of buying and selling. The "target" remains the same, in yesterday's case, 1710.

 

Many novices will link "small bar interval" with "small target". This is a fundamental misunderstanding of what reading price action is all about. As Bearbull pointed out earlier, one is more likely to misunderstand intent with a longer bar interval than with a shorter one.

[BlowFish 10]

Just playing devils advocate but to a trader with a 'monthly' perspective the daily S/R might 'translate into nothing' (or if not nothing, less than they are interested in).

 

Similarly a more hyper active trader (a 'scalper' if you will) might focus on nailing 'hourly' S/R rather than 'daily' S/R.

 

(I appreciate 'hourly', 'monthly' and 'daily' are artificial constructs)

 

There is an important lesson here though (well at least I think so) and that is knowing what your focus is. I fully agree that markets don't trade in nice discrete 5 minute, hourly, daily, weekly, chunks. However, it is convenient when you are trying to decide what size moves you are trying to capture to consider a suitable time frame to focus on. A 50 point ES move will take longer to develop than a 5 point move regardless of the bar size you use to monitor it. Put another way if you want to make roughly 5 points on a trade that will dictate the 'time frame' to focus on, this will tend to suggest suitable charts to use. In this case time frame is not the same as chart time frame it is the scope of the trade.

 

A wise man ( DB someone or other ) once said the chart is just a map not the territory. Having a suitably scaled map for the journey makes navigation easier.

[mister ed 10]

The "smaller" S&R don't translate into anything. They are merely components of the waves of buying and selling.

 

Yes, yes, yes! We are getting somewhere here.

 

Many novices will link "small bar interval" with "small target". This is a fundamental misunderstanding of what reading price action is all about.

 

Ya gotta remember those different scales Db - not everyone is going to have the same 'target' as you. Not every chart is going to be useful for the same thing. By all means use the 1 minute (or whatever) to help with entry for 'your' target, but recognise that a small interval is extremely useful for a small target for someone else's trade.

 

In the end, reading price action is just one component of trading. Many novices miss this point. Yes its an important component of trading, but where the rubber hits the road its about risk management and to expect a 'pattern' on the 1 minute to give the same result as a 'pattern' on a larger scale is going to end in disappointment much of the time.

 

Thank-goodness this is a pre-Fed announcement morning, allowing us the luxury of some navel-gazing! Over to you for the last word!