[VSA] Volume Spread Analysis Part II

[mister ed 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).

 

 

Bingo! ....................

[DbPhoenix 42]

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.

 

On the other hand, however many points one "wants to make" have nothing to do with the number of points that are available, which is a chief reason why so many traders cut their profits short.

 

As to artificiality, daily, weekly, monthly are not necessarily artificial since there is in fact a literal close (at least with regard to stocks). Intraday, however, is a different proposition since there is no close during the day (this is what is fundamentally illogical about applying VSA to an intraday timeframe).

 

In any case, what is support or resistance on a weekly will also show on a daily, as well as intraday, which is a convenient means of determining what is "important" S/R and what is trivial.

Edited March 18, 2008 by DbPhoenix

[DbPhoenix 42]

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.

 

Again, the bar interval has nothing to do with the target. A smaller bar interval enables one to read price action more accurately. That's all. It carries no target baggage unless the trader chooses to hook it up himself.

 

As to whatever disappointments there may be, these are the result of a lack of skill in interpreting price -- and volume -- action, not of the bar interval one chooses to display twice.

[zeon 10]

Again, the bar interval has nothing to do with the target. A smaller bar interval enables one to read price action more accurately. That's all. It carries no target baggage unless the trader chooses to hook it up himself.

 

I take it a smaller bar interval helps you pinpoint entries and exits more precisely? Traders (like myself) that sometimes wait for a bar to close have the disadvantage of never making that perfect entry.

 

As to whatever disappointments there may be, these are the result of a lack of skill in interpreting price -- and volume -- action, not of the bar interval one chooses to display twice.

 

Are you saying that - if price does something other than what you'd expect it to do - you've misread the chart? I mean, that's what I want to believe. Others have said that I shouldn't try so hard in getting it right. It's just not possible. Or is it (except for these unanticipated news events which can't be foreseen)?

[dandxg 10]

Such a interesting debate on S/R! I actually can see both sides and how they make sense. Do I want to hold on and do my best to read price, volume, and order flow and go for what I call the longer dollar? For the "bigger" and possibly "more relevant" S/R area.

 

Or do I see that we are retesting the low or range after selling a pullback on lower volume and trail stop or just punch out?

 

I personally feel this is answer that only an individual can answer for himself no one can profess to "know the right answer" as everyone is trading their own money and no one knows where the market will absolutely go. If we did there would be no reason to read the tape right?

 

It's discussion such a these that remind me trading is much art than science.

[mister ed 10]

Are you saying that - if price does something other than what you'd expect it to do - you've misread the chart?

 

Zeon, saying that is being incredibly hard on yourself. By all means strive to improve your chart reading and therefore entry decision, but you know that not every trade is going to work out profitably. It is about risk management, strive even harder to get that right and you will be fine.

[DbPhoenix 42]

I take it a smaller bar interval helps you pinpoint entries and exits more precisely? Traders (like myself) that sometimes wait for a bar to close have the disadvantage of never making that perfect entry.

 

It's not a question of being precise and perfect. It's a matter of locating support and resistance accurately, then monitoring traders' behavior when those levels are approached. If one monitors that behavior in terms of where a bar closes, then he is inserting one or more filters between what is happening and his perception of it.

 

Are you saying that - if price does something other than what you'd expect it to do - you've misread the chart? I mean, that's what I want to believe. Others have said that I shouldn't try so hard in getting it right. It's just not possible. Or is it (except for these unanticipated news events which can't be foreseen)?

 

One determines an expectation according to the information that is available to him at the time he determines the expectation. In the next instant and the following instants, more information becomes available which may, all or in part, change the expectation, all or in part. If one has decided in advance that he will be "wrong" then and for all time if his expectation requires modification, then he will not be available to whatever the market offers. He will instead sit there, immobilized, trying to figure out where he screwed up.

[DbPhoenix 42]

Such a interesting debate on S/R! I actually can see both sides and how they make sense. Do I want to hold on and do my best to read price, volume, and order flow and go for what I call the longer dollar? For the "bigger" and possibly "more relevant" S/R area.

 

Or do I see that we are retesting the low or range after selling a pullback on lower volume and trail stop or just punch out?

 

As to the latter, that depends on whether you are exiting based on a predefined reversal signal or you are exiting out of fear that whatever profit you may have may turn into a loss, or you are already in a loss position, or you are trying to make back money that you lost on an earlier trade, or you're tired of a string of losses and want to win for a change, and so on. The market couldn't care less about any of this.

[Bearbull 10]

Again, the bar interval has nothing to do with the target. A smaller bar interval enables one to read price action more accurately. That's all. It carries no target baggage unless the trader chooses to hook it up himself.

 

As to whatever disappointments there may be, these are the result of a lack of skill in interpreting price -- and volume -- action, not of the bar interval one chooses to display twice.

 

Some charts to illustrate your point:

 

1. Basic upthrust : sign of weakness is it not? TG signal afterall, ideal place for short, chart 1

 

2. Dogs did not bark chart 2, again End of Rising Market on huge vol, bar closing in the middle, supply swamping demand, short again????

 

3. chart 3, wrong again.

[Eiger 10]

Some charts to illustrate your point:

 

1. Basic upthrust : sign of weakness is it not? TG signal afterall, ideal place for short, chart 1

 

2. Dogs did not bark chart 2, again End of Rising Market on huge vol, bar closing in the middle, supply swamping demand, short again????

 

3. chart 3, wrong again.

 

The UpThrust is in an uptrend, and not a valid signal. You have to see an UpThrust after weakness. There is no weakness on that chart. When you have weakness in the background (Buying Climax, distribution range, or a down trend), it is an excellent signal.

 

It is an upthrust, but in the wrong context. It thus has little meaning, as far a signal goes. It's what they call a "polar bear in Hawaii."

 

The End of a Rising market had some volume, but I'll bet not ultra high for that market. Also, it has a wide spread. You really want to see ultra high volume on a narrow range bar into new high ground. Close doesn't seem to matter. These are pretty rare. The idea is that buyers are attracted because the market has hit new highs (big news, everyone sees it). But, with the narrow range, the market is being capped and selling is swamping demand. More than one or two day's worth of data is needed to have a valid ERM signal.

 

Hope this helps,

 

Eiger

[CandleWhisperer 10]

Some charts to illustrate your point:

 

1. Basic upthrust : sign of weakness is it not? TG signal afterall, ideal place for short, chart 1

 

2. Dogs did not bark chart 2, again End of Rising Market on huge vol, bar closing in the middle, supply swamping demand, short again????

 

3. chart 3, wrong again.

 

 

1. First, I do not like TG software. I will however, say in their defense that triangles are not as strong of signals as rectangles.

 

1a. There is no weakness in the background. This is a "Polar bear In Hawaii".

 

1b. There are not obvious areas of resistance on the chart. Even a basic pivot level might add some value to the sign of weakness.

 

1c. These are NOT buy and sell signals they are signs of strength and weakness. If you are using them as signals to go long or short you are no better than the guy following RSI signals.

 

2. End of a rising market is a narrow range bar on ultra high volume closing on the high into new ground. Simply, this in NOT that. It is a Transfer of ownership type bar that does not result in downside price action. Hence we have effort with no result (this is strength).

 

3. These thing happen in various levels of intinsity. What may be happening here is mere profit taking.

 

3a. I hope you are not looking for that holly grail method that neve takes a loss. Losses happen. Methods are wrong. ALWAYS USE STOPS AND DON'T GET MARRIED TO A POSITION.

[Bearbull 10]

3a. I hope you are not looking for that holly grail method that neve takes a loss. Losses happen. Methods are wrong. ALWAYS USE STOPS AND DON'T GET MARRIED TO A POSITION.

 

Thank you so much for the enlightenment on VSA, I borrowed the charts from a colleague who uses TG to illustrate what Db was trying to explain.

I do not trade via VSA signals, period, have enough Wyckoff sense to realise that no holy grail exists outside of ourself;)

[DbPhoenix 42]

So lest the original point not be lost, where was the "background of weakness" that prevented the trade discussed in post 477 (which is what prompted this arc in the first place)?

[Eiger 10]

On the other hand, however many points one "wants to make" have nothing to do with the number of points that are available, which is a chief reason why so many traders cut their profits short.

 

It's more complicated than that. Humans aren't really very good at handling risk; it doesn't come naturally. As a result, we as traders have to fight natural tendencies to cut gains short and let losses run. It is one of the things that make trading so difficult and keeps many from success.

 

Eiger

[DbPhoenix 42]

It's more complicated than that. Humans aren't really very good at handling risk; it doesn't come naturally. As a result, we as traders have to fight natural tendencies to cut gains short and let losses run. It is one of the things that make trading so difficult and keeps many from success.

 

Eiger

 

The process of making the most of a given move may not necessarily be easy, simple though it may be. However, whatever personal idiosyncracies prompt one to take only a portion of the profits available have nothing to do with what profit opportunities the market provides.

[Eiger 10]

However, whatever personal idiosyncracies prompt one to take only a portion of the profits available have nothing to do with what profit opportunities the market provides.

 

The point I was making is that it has little to do with person idiosyncracies. People, on average, have a difficult time letting profits run. It is refered to as the "disposition effect" by psychologists. Our decision-making processes may have evolved in this way. Evolution may have favored those who secured the "one in the hand" over those who sought "two in the bush." Evolution or not, we seem to be mentally organized in this way, which works well most of the time, but not so well in trading. Thus, we as humans have a very strong tendency or bias in taking profits quickly. It has little to do with personal attributes.

 

Eiger

[Eiger 10]

The odds may be favoring a Spring on the daily ES & NQ charts.

[DbPhoenix 42]

The point I was making is that it has little to do with person idiosyncracies. People, on average, have a difficult time letting profits run. It is refered to as the "disposition effect" by psychologists. Our decision-making processes may have evolved in this way. Evolution may have favored those who secured the "one in the hand" over those who sought "two in the bush." Evolution or not, we seem to be mentally organized in this way, which works well most of the time, but not so well in trading. Thus, we as humans have a very strong tendency or bias in taking profits quickly. It has little to do with personal attributes.

 

Eiger

 

I won't argue the point. But whatever is "on average" is of no relevance to one's success in overcoming these tendencies unless one uses it an excuse not to try.

 

Again, a "small" bar interval does not necessarily demand a small target and small profits. The task is to buy support and sell resistance unless something intervenes that forces one to change his tactics. If one grabs small profits, it will have to be because he wants to and not because he has to or because everybody does it.

[brownsfan019 17]

Ok, I have to ask (time to stir the pot) - as a lurker of this thread and reading some great things (esp DB) I have one question to ask...

 

Is anyone here actually using this in real-time and making money?

 

I see a lot of 'after the fact' analysis, which is fine for learning, but I'm really curious if anyone outside of DB can do this when it counts - real-time and real money...

 

Just curious, not meant to piss anyone off.

[mister ed 10]

Is anyone here actually using this in real-time and making money?

 

If by 'this' you mean Wyckoff analysis then yes.

[DbPhoenix 42]

Ok, I have to ask (time to stir the pot) - as a lurker of this thread and reading some great things (esp DB) I have one question to ask...

 

Is anyone here actually using this in real-time and making money?

 

I see a lot of 'after the fact' analysis, which is fine for learning, but I'm really curious if anyone outside of DB can do this when it counts - real-time and real money...

 

Just curious, not meant to piss anyone off.

 

Actually, there's no "evidence" that I'm doing it either. Unless one hires a mentor who will sit with him day after day and show him how to trade one on one and stay with him until he has demonstrated that he can do it on his own, then there's really no other way to learn it than through the principles demonstrated through hindsight analysis.

 

Hindsight analysis is great for learning principles. That's pretty much what books are all about, whether the subject is trading or something else. And hindsight analysis is fine for backtesting, either manual or computerized.

 

But at some point, one has to test forward, one has to implement these principles in some sort of trading, preferably simtrading first, then real trading. He then learns whether the principles are theoretically true but practically -- at least for him -- crap. And if no one can demonstrate that these principles are in fact useful and useable, then he can assume that the "principles" are crap in the absolute.

 

So when someone can do nothing more than tell you what you should have done, you have every reason to be skeptical, just as when someone is vague and general and tapdances a lot. It has to make sense. It has to be logical. If it isn't, and it doesn't, then avoid resorting to faith, keep your wallet in your pocket, and continue searching.

[rodney 10]

It's not a question of being precise and perfect. It's a matter of locating support and resistance accurately, then monitoring traders' behavior when those levels are approached. If one monitors that behavior in terms of where a bar closes, then he is inserting one or more filters between what is happening and his perception of it.

 

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

 

Hi Db

I have quoted above from 2 different posts you have made - and could have picked a couple more. There is something you are saying that I would like to focus on - if you are willing to elaborate.

 

 

First, in what specific ways are you " monitoring traders' behavior when those keys levels are approached." ?

 

Second, if I hear you correctly, you choose again and again to focus on market flow, and not dwell on a particular bar interval or bar close. That makes sense.

 

If I interpret VSA correctly and can oversimplify VSA, then "market flow" is composed of a balanced interpretation of what is happening in the background as compared to what is happening as the current bar forms.

 

Can you elaborate some more on how you read "market flow" as price approaches support and resistance?

 

 

 

One determines an expectation according to the information that is available to him at the time he determines the expectation. In the next instant and the following instants, more information becomes available which may, all or in part, change the expectation, all or in part.

 

 

I don't want to over complicate this. On the other hand, I don't want to miss what you are saying.

 

As you approach a "decision point," is there some over-riding anchor point from which you are interpreting this constant flow of new price information?

 

When you say to yourself, - based on this new flow of information - my earlier expectation is not developing. Or when you say to yourself, my earlier expectation is developing. What are the decision-time "signs of flow" that you are looking at ? Are there specific signs that must be in place?

 

Is your "decision time" interpretation of flow any different than the classic VSA signals - such as volume, range, close, prior swing highs, etc that are discussed so much on this board?

 

Picking up on on one of Eiger's recent posts, our brains [ emotions ] are "hard wired" and vulnerable to odd behavior at "decision time" - and especially vulnerable when facing a constant assault of new information.

 

Rodney

[DbPhoenix 42]

 

First, in what specific ways are you " monitoring traders' behavior when those keys levels are approached." ?

 

Second, if I hear you correctly, you choose again and again to focus on market flow, and not dwell on a particular bar interval or bar close. That makes sense.

 

If I interpret VSA correctly and can oversimplify VSA, then "market flow" is composed of a balanced interpretation of what is happening in the background as compared to what is happening as the current bar forms.

 

Can you elaborate some more on how you read "market flow" as price approaches support and resistance?

 

The whole VSA thing has become much too complicated what with TG and SMI and so forth, so I'll just set all that off to the side and leave it to someone else to sort out.

 

People hate it when I suggest they go read something, but for five days I posted my prep and my post-analysis to my Blog. Perhaps all of that will help you. Otherwise, I determine potential S&R beforehand, then I watch how traders behave when those levels are approached. Is price driven down rapidly to support where it then makes a single print and bounces violently? Does it glide in to support and bounce gently along? Does it hammer away at it again and again as if trying to break through a door? And what's the TICKQ doing all this time? What's going on with volume? Is there a classic decline on the retest, if any? Do buyers pile in as expected, or do we begin a search for a new equilibrium (or "value") level? And sometimes, nobody shows his hand, and the only thing to do is wait until somebody does, then look for an opportunity to enter, usually that first pause after the excitement begins (which one will likely miss if he's looking at a too-large bar interval).

 

I don't want to over complicate this. On the other hand, I don't want to miss what you are saying.

 

As you approach a "decision point," is there some over-riding anchor point from which you are interpreting this constant flow of new price information?

 

When you say to yourself, - based on this new flow of information - my earlier expectation is not developing. Or when you say to yourself, my earlier expectation is developing. What are the decision-time "signs of flow" that you are looking at ? Are there specific signs that must be in place?

 

Is your "decision time" interpretation of flow any different than the classic VSA signals - such as volume, range, close, prior swing highs, etc that are discussed so much on this board?

 

I probably don't understand what you're asking since I can't think of anything to add to what I said above. If support is not found where I expected it to be found, then I wait for the market to tell me where it is. But rarely is it in a much different place than I thought it would be.

 

As for the "classic VSA signals", assuming you mean VSA rather than TG-VSA, whatever has to do with a bar is not all that important to me, much less where it closes. Once one gets into all that, he may as well trade candle patterns and save everybody a lot of time. Nor do I buy into the conspiracy-manipulation attitude. That can easily put one into a self-defeating mindset in which every aggressive move may be a trap of some sort, and by the time he figures it out, the opportunity is past.

 

Buying pressure and selling pressure -- or demand and supply, if you will -- are continuous. The balance between them is dynamic and never-ending. One can partition all of this into bars and try to determine where the imbalances between buying pressure and selling pressure lie within a particular bar, or even a series of bars, but so what? What is important is the flow, the waves of buying and selling pressure, the waves of rising and falling support and resistance. I could try to copy out some of what Wyckoff says about all of this from his tape reading course, but really the best way to understand it is to create a chart with no more than a 1m interval and just watch it as it moves back and forth between support and resistance. And by "just watch it", I mean just that. Don't worry about what you're going to do about whatever it is you're looking at. Don't worry about where you'd enter or where you'd exit or how much money you'd make or whether you'd have been right or wrong to do whatever. Just watch. Like fish in an aquarium. If that seems only slightly less exciting than watching concrete harden, then collect the data and replay it later at five or ten times normal speed. You can do an entire day in little more than half an hour.

 

None of which may have anything to do with "classic VSA", of course, but I didn't want to ignore your question. On the other hand, if one wants to understand the "background" and whether it signals strength or weakness, I can't think of a better way of doing it. And it won't cost you anything.

 

And one more thing. Learning while doing if "doing" means doing with real money is not an absolute good. If you don't have a consistently profitable strategy and you're not limiting yourself to the setups within that strategy, then you're not trading, you're gambling, and the longer you "work" this way, the longer it will take. If you don't have all of this yet, then stop. Put your money back in your pants and learn your business. There's plenty of time. The market will be there long after you're dead.

Edited March 19, 2008 by DbPhoenix

[rodney 10]

Thanks Db

You answered extremely well.

[zeon 10]

...but really the best way to understand it is to create a chart with no more than a 1m interval and just watch it as it moves back and forth between support and resistance. And by "just watch it", I mean just that. Don't worry about what you're going to do about whatever it is you're looking at.

 

As the topic of discussion in the last couple of posts has shifted a bit, I feel it's appropriate to ask a relevant question here.

 

Db, I've taken your suggestion for using tick charts and looked at price the last couple of days with Sierra Charts. You said I'd be "perpetually perplexed" if I kept focusing on bars instead of price flow. I've tried doing this now but at at 5 second or 1 minute chart I've found it incredible hard to notice anything that jumps out from the rest.

 

I've payed close attention to see where price reacts and I've written down when high volume suddenly comes in and price seems to hit something and suddenly reverses, like a hot stove where you put your hand on. But a lot of these times, I was wrong and the 'reversal' only happened for a couple of minutes. I've found it very difficult to analyze which volume peaks are important and which ones not, despite focusing only on those that are in the vicinity of important S/R levels.

 

If I compare to my 5-minute bar interval, I usually have a couple of volume peaks that are clearly distinguishable from the rest. But on a 1-min bar interval, there are loads and if I were to trade off those, I'd be getting a lot of false signals...