[VSA] Volume Spread Analysis Part II

[Sledge 13]

Unfortunately as I'm typing this, price has just come down again, approaching the entry-point hmm.

 

Since I'm literally trading this blind, my assumption was that if it is waivering a bit up and down- don't panic.

A. People who went short may be closing out of positions

B. Trailing stops or Stop Losses are being triggered

 

So this will pop a tad bit of supply into the market. It may range around down on that bottom for a while. How low was the volume on the shakeout?

If it was HIGH, it may test again (They will be looking to see if the floating supply is gone!)

 

I'd hang tight- without seeing the chart- I'd say you are sitting pretty on a long!

Sledge

[zeon 10]

Unfortunately as I'm typing this, price has just come down again, approaching the entry-point hmm.

 

 

What the ****? 12300 right now... it just broke lower like nothing.

[brownsfan019 17]

I'm just a newbie compared to you guys but from my observations I'd say candle formations and VSA compliment eachother very nicely. They sort of go hand-in-hand, no use comparing one against the other. Use both and things become much clearer. I'm sure there are plenty of trades that can be taken just by using candles alone, but VSA can give you a greater understanding of the potential of certain moves. Just my humble opinion...

 

I couldn't agree more. That's all I was trying to do - help some guys out with a little thing that could aid in their trading.

 

Then it turned into a pissing match of what the candle was called... what a joke. The name of the pattern is useless but that was falling on deaf ears.

[zeon 10]

Since I'm literally trading this blind, my assumption was that if it is waivering a bit up and down- don't panic.

A. People who went short may be closing out of positions

B. Trailing stops or Stop Losses are being triggered

 

So this will pop a tad bit of supply into the market. It may range around down on that bottom for a while. How low was the volume on the shakeout?

If it was HIGH, it may test again (They will be looking to see if the floating supply is gone!)

 

I'd hang tight- without seeing the chart- I'd say you are sitting pretty on a long!

Sledge

 

I wish that was the case.

Here's what happened next.

 

 

[Sledge 13]

I know this is not standard VSA work, but just take a look and see if it can help in your trading at all.

 

Bf-

It ALL helps. Luckily for me I started trading with candles and later switched to Bar Charts, so I feel lucky I can look at a Candle Bar and still see a Bar Chart form in my brain.

 

As far as VSA- I see a WSB down, closing on the high with Ultra High Volume-looks like stopping volume to me and a "licking my chops" point of entry to go long!

 

I'd ask you keep posting what you see, this is the second one of these you posted, in as many days, and it just keeps it "top of mind" in my brain (hopefully other posters as well?!) To be able to "See it, know what it means, react"

Sledge

[Sledge 13]

I wish that was the case.

Here's what happened next.

 

 

[ATTACH]5705[/ATTACH]

 

Zeon-

Ok well with the initial chart you posted, you knew to look out for the Downward test (which came in around 12330) So you see the test, and enter your long at 12330. You ride that to the 12420. You hang on and let that bar form and when it forms into an upthrust, that would have been my signal to exit for now.

 

At very worst, utilize what Tom Williams says, you see TWO DOWN BARS IN A ROW (in this case) you would have exited at 12370 and still made profit.

 

One other point, look at the volume on the down move that headed towards the resistance- it was decreasing- yes, but look at it in perspective to the PREVIOUS down move that didn't break it- it is higher, it had a great chance to break that resisitance- and indeed it did!

 

Hope you got in low and exited on that upthrust! Or shorted after it!

Sledge

[zeon 10]

Zeon-

Ok well with the initial chart you posted, you knew to look out for the Downward test (which came in around 12330) So you see the test, and enter your long at 12330. You ride that to the 12420. You hang on and let that bar form and when it forms into an upthrust, that would have been my signal to exit for now.

 

At very worst, utilize what Tom Williams says, you see TWO DOWN BARS IN A ROW (in this case) you would have exited at 12370 and still made profit.

 

One other point, look at the volume on the down move that headed towards the resistance- it was decreasing- yes, but look at it in perspective to the PREVIOUS down move that didn't break it- it is higher, it had a great chance to break that resisitance- and indeed it did!

 

Hope you got in low and exited on that upthrust! Or shorted after it!

Sledge

 

 

I take it you mean "support" when you said resistance?

 

And no, I didn't exit because the plan is to ride the trade till the next resistance level. Doing anything else would mean I'm just greedy and taking profits quickly.

 

I'm sorry, but I don't know how much worse this can get now. :shrug:

[Sledge 13]

I take it you mean "support" when you said resistance?

 

And no, I didn't exit because the plan is to ride the trade till the next resistance level. Doing anything else would mean I'm just greedy and taking profits quickly.

 

I'm sorry, but I don't know how much worse this can get now. :shrug:

 

Well, I'm not sure--if the market is as a whole (larger timeframe) is in a downward trend, and it is looking for lower prices, I'd say resistance is appropriate.

 

My personal trading style may differ from yours, but I honestly would not think that taking your money off the table when you saw such a drastic retreat is greedy- it is smart.

 

Sledge

[CandleWhisperer 10]

I may be talking out my backside here, but I think you are across the pond. If so then 1230 on your chart equates with 830 NY time. My analysis is based on this assumption.

 

a: This is the key candle. WRB formed when there was a news release about Jobless claims.

 

b: High volume up bar that closes in the middle of its range. The close in the middle of the range shows that supply has entered. If all the volume was buying (demand), then the close should not be in the middle.

 

c: this is a test. It is also a squat. Some demand comes in here.

 

d: The very next bar is weakness as we have an up bar on volume less than the previous two bars closing in the middle of its range. This is no demand.

 

 

e: Price moves up a bit however. Yet we get a wide spread bar that closes on its highs on volume less than the previous two bars. This is no buying pressure. Again weakness.

 

f: Up thrust. Closing on the lows of the bar on greater volume and making a higher high than the previous bar. Note the close is now equal to the level of the close on the test.

 

h: the chart says hidden selling, however there is nothing "hidden" about it. We have a widespread down bar on high volume. Most down bars on high volume are selling. If the next bar had been up then there would of been hidden buying.

 

edit: sorry neglected to say that the first sign of supply was on a.

[brownsfan019 17]

I may be talking out my backside here, but I think you are across the pond. If so then 1230 on your chart equates with 830 NY time. My analysis is based on this assumption.

 

a: This is the key candle. WRB formed when there was a news release about Jobless claims.

 

b: High volume up bar that closes in the middle of its range. The close in the middle of the range shows that supply has entered. If all the volume was buying (demand), then the close should not be in the middle.

 

c: this is a test. It is also a squat. Some demand comes in here.

 

d: The very next bar is weakness as we have an up bar on volume less than the previous two bars closing in the middle of its range. This is no demand.

 

 

e: Price moves up a bit however. Yet we get a wide spread bar that closes on its highs on volume less than the previous two bars. This is no buying pressure. Again weakness.

 

f: Up thrust. Closing on the lows of the bar on greater volume and making a higher high than the previous bar. Note the close is now equal to the level of the close on the test.

 

h: the chart says hidden selling, however there is nothing "hidden" about it. We have a widespread down bar on high volume. Most down bars on high volume are selling. If the next bar had been up then there would of been hidden buying.

 

edit: sorry neglected to say that the first sign of supply was on a.

 

So is there any actual trading taking place here or just a bunch of observations after the fact? Where are trades actually taking place on your analysis CW? I've laid out where I enter and the potential profit. Even told you when I took +8 and it ran for more.

 

Just curious if there is real trading being done there or just a little after the fact look.

[brownsfan019 17]

Bf-

It ALL helps. Luckily for me I started trading with candles and later switched to Bar Charts, so I feel lucky I can look at a Candle Bar and still see a Bar Chart form in my brain.

 

As far as VSA- I see a WSB down, closing on the high with Ultra High Volume-looks like stopping volume to me and a "licking my chops" point of entry to go long!

 

I'd ask you keep posting what you see, this is the second one of these you posted, in as many days, and it just keeps it "top of mind" in my brain (hopefully other posters as well?!) To be able to "See it, know what it means, react"

Sledge

 

Well said Sledge. You hit the nail on the head - WRB analysis and being aware of these can be critical on higher timeframes as we saw this morning.

 

In my view, a WRB simply shows a TEMPORARY imbalance between the bulls and bears. To have that followed up by a high volume hammer... WOW... can't ask for anything more.

[CandleWhisperer 10]

So is there any actual trading taking place here or just a bunch of observations after the fact? Where are trades actually taking place on your analysis CW? I've laid out where I enter and the potential profit. Even told you when I took +8 and it ran for more.

 

Just curious if there is real trading being done there or just a little after the fact look.

 

No trade here BF I was just making some observations on a chart posted by Z.

[dandxg 10]

I take it you mean "support" when you said resistance?

 

And no, I didn't exit because the plan is to ride the trade till the next resistance level. Doing anything else would mean I'm just greedy and taking profits quickly.

 

I'm sorry, but I don't know how much worse this can get now. :shrug:

 

I tend to agree that if you are plus some points atleast move your stop to B/E. If you aren't going to move your stop to B/E then you have to be able to tape read and read order flow very well. As mentioned an example of this would be see 2 down bars tells you that order flow is changing again, possibly. I haven't looked at your specific example, so pardon me, but you want to increasing volume on candle closing up, but not excessive, and decreasing volume on the down bars. If you are seeing something other than that expect that your long may be drying up. Just some suggestions for you. By no means do I have the grail.

 

Another suggestion, wait for it to clear that resistance overhead and then buy a pullback on lower volume. You will have missed points, but you want be trying to guess if the trend is going to change. If you attempt to buy that pullback be aware of where the next overhead resistance is to the left of you entry or on the next higher time frame chart you look at. I do think filtering these set ups with NYSE tick or Ticki for Naz would help. Just some food for thought.

[zeon 10]

Just curious if there is real trading being done there or just a little after the fact look.

 

 

All of my posts from today were in real time brownsfan. I'm not hoping on much real time comments as other people are probably trading their own stuff. I appreciate anybody who's willing to help me explore this further and help me out in gaining a better understanding, because so far this would be the 14th losing trade in-a-row...

[zeon 10]

I tend to agree that if you are plus some points atleast move your stop to B/E. If you aren't going to move your stop to B/E then you have to be able to tape read and read order flow very well. As mentioned an example of this would be see 2 down bars tells you that order flow is changing again, possibly. I haven't looked at your specific example, so pardon me, but you want to increasing volume on candle closing up, but not excessive, and decreasing volume on the down bars. If you are seeing something other than that expect that your long may be drying up. Just some suggestions for you. By no means do I have the grail.

 

Thanks for the suggestions. Moving my stop to breakeven is usually something I do after price has moved closer to my target. However in this case, the 'signal' to move the stop was just missed, if it went a bit higher I'd have move my stop. I definitely use this strategy, because it's very frustrating once you see a profitable trade turn into a loser.

 

Another suggestion, wait for it to clear that resistance overhead and then buy a pullback on lower volume. You will have missed points, but you want be trying to guess if the trend is going to change. If you attempt to buy that pullback be aware of where the next overhead resistance is to the left of you entry or on the next higher time frame chart you look at. I do think filtering these set ups with NYSE tick or Ticki for Naz would help. Just some food for thought.

 

I've observed the TICK for some time and I've also noticed dbphoenix employing the TICK for the NQ, but according to what I've read the tick can sometimes invalidate a good setup, or at other times confirm a bad setup. For the time being I think it's best if I keep it just to price & volume because the signals already seem to be confusing enough... If I'd add another layer I fear I might have tick saying go long, price saying short and volume saying stay flat... if you know what I mean.

[dandxg 10]

Zeon, just a suggestion to keep in mind. If you look at a daily chart of the ES, for example we appear to have formed a bottom as off 1/22 and 1/23. Then on the 17th of this month we retested that area on lesser volume. So from a PV we are attempting to transition from bear to bull market. You have alot of folks that look at 50 and 200 DMA on the daily, including big funds. We are struggling at the 50 right now. This is normal action to be expected as the ES, and it's siblings attempt to transition from bear to bull a zig zag back and forth. This zig and zag action can knock us out of perfectly good trades on small time frame.

 

This is actually healthy as long as we don't take out the low of 1255 with increasing volume. The greater the energy built up in the accumulation phase the great the move up with be. The ES is attempting to form accumulation phase right now on the daily. If you look at your own set up how many candles or bars made up that accumulation phase, many not many? If not many than the move up many not go far as there wasn't much stored energy. My point being to all this is be nimble for the next week. I think your expectation of it retesting overhead resistance is correct and it's important to remember that this is game of probabilities not certaintities.

 

You have end of quarter and there may be some bad earnings for banks and others. I don't trade off of fundamentals, but it's silly to not think that some really good or bad earnings isn't going to affect your position.

 

This is debatable, but it's the bigger money which trades off of bigger time frame that propel the big moves, not us day traders we just need to read the macro picture correct and ride the wave. The Macro picture to me is in a state of transition. From bear to attempting to be a new bull market. I think Wyckoff called it hitch hiking, riding the wave that is. Anyway hope this helps. Good trading to all.

[Eiger 10]

I am away out of town and not trading through early next week. I won't be near a trading computer during the weekdays.

 

A few quick comments:

 

Just because there is a support level and price hits it and bounces from it does not mean we are now in an uptrend. It also does not mean that price will travel from that support area to the next overhead resistance area, especially in a downtrend.

 

Trends:

 

A simple, but effective rule of thumb for a downtrend is to see a series of lower highs and lower lows. Once you see a lower high followed by a lower low, you should be thinking short, watching for low volume, narrow spreads, and looking for no demand and upthrusts on the next rally.

 

On Monday, the market made a high. Tuesday saw a lower high. Yesterday, there was a lower low and another lower high -- I am doing this from memory (I don't have charts in front of me), so I could be off, but you should get my drift. We are in an established down trend. Resistance for today was at yesterday afternoon's rapid run up (about 3:00-3:15, or so). That is key resistance for today because obvious supply came in there, driving the market down to the lower support area (about 1336, I think), making another lower low. Put up a 30 or 60-min chart that includes this week's data (from Monday) and draw trend lines. You should be able to see the downtrend clearly. (I think I posted a chart showing the downtrend yesterday?)

 

Weakness on the daily:

 

Sebastian also provided us with an astute analysis of the market. He saw significant supply confirmed by a failed test. Just a casual look at the daily chart would show a recession of volume on the last few days of the rise, indicating some level of weakness.

 

Practical application to trading:

 

Tom Williams makes a clear point in his book: As a trader, you really want the market to tell you what to do. During the last two days, it was saying you wanted to be short. If you take a long trade at support in this kind of environment because you see a little demand come in, that's OK, but it is best to trade this as scalp only, until we have an uptrend or a clear indication that good demand is coming into the market and the trend is likely to change. You can't expect bigger moves on long trades in a down trend. In any event, most trades over the last two days were best taken on the short side.

 

See you next week,

 

Eiger

[Sledge 13]

it's very frustrating once you see a profitable trade turn into a loser.

 

Zeon-

All I can hear over and over in my head is Todd K saying "Bank $" "You've got to Bank $"

 

Their is NO SHAME in taking a quick hit and banking $. If it didn't go where you anticipated- bank your money and after you are counting your cash, you can analyze why it didn't, learn from it and look for your next set-up!

 

Sledge

[Sledge 13]

Beautiful "Head and Shoulders" pattern formed on the GBP/USD this AM.

As it should the "Left Shoulder" volume is higher than the right. After a wild night in the London session we are having some slight pullback occouring as NY opens with London taking profits, and some sideways consolidation.

 

My position:

Pending order placed at 1.9896. This would be about 30 pips below the "Neckline" and would be a safe entry with plenty of room to run if triggered. I doubt it will go today, but it is in, just in case- while I am away from my trading platform, the pullback retreats enough and downward we go!

 

Sledge

 

head_shoulders.bmp

[dandxg 10]

Sledge, I know it's not VSA per se but I think that's potentially a nice set up. A gentleman named Jason Jankovsky that I learned some good stuff from on price and volume told me that H & S is one of the best TA set ups. I don't monitor this market so I have no idea how it turned out. I have studied these and as I recall you want to see the neckline break on increasing volume and then a pullback on lower volume, possibly a no demand or combo no demand upthrust would be a nice potential set up. Anyway hope you made some $$$ if you took it.

[CandleWhisperer 10]

FIRST PRINCIPLES:

 

Someone in the first VSA thread mentioned the concept of first principles, I would like to continue that discussion.

 

I saw a quote from a trading site called eminidaytrader. No affiliation, just giving credit where credit is due. This quote could be described as one of there first principles. I would like to compare and contrast this principle with the first principles of Volume Spread Analysis.

 

" Markets move up to find sellers and down to find buyers. That's all their is.."" eminidaytrader.

 

Of course any discussion of VSA first principles, must begin with THE first principle:

 

1. Markets are manipulated.

 

Principle 1a. would be:

 

1a. Strength enters on down bars and weakness enters on up bars. At first glance this seems to be compatible with the above quote, but we must delve deeper into this to understand the difference. I will do this by first looking at 4 key vsa bar types and then by examining a more general bar situation.

 

Test:

 

The ideal test is a narrow range bar that makes a lower low, closes down from the previous bar on volume less than the previous two bars and closes on its middle or high. Therefore we have a down bar. However, what the BBs are actually doing is Not looking to attract buyers, they are looking to attract sellers. Price is moved down to see if sellers will come into the market. That is why a good test has low volume. No sellers enter as price falls. Buyers entering would actually be met by more supply causing prices to fall, not rise. Failed tests therefore have high volume because supply was found (entered) on the down bar.

 

No Demand:

 

In many respects this is like a test to the upside. The ideal no demand bar will be an up bar that makes a higher high on volume less than the previous two bars and closes on its middle or low. A sign of no demand shows that there is little or no professional interest in higher prices. Prices is driven up not to find sellers, it is driven up to find (or not find) smart money buyers. if the no demand is properly placed, the supply already entered before the no demand bar. While we do not think in terms of a failed no demand, an up bar with increasing volume shows buying pressure. Therefore this would mean up bars attracting buying (more on this later).

 

Up Thrusts:

 

There are two types of up thrusts.

 

1. Up thrust in the form of no demand. This type of up thrust will be a wider range bar making a higher high, closing up from the previous bar, closing on higher volume and closing on its low. Now here is the rub; an up thrust is used to entice the herd into buying. When the actual intention is to see price head south. In other words, price is increased not to attract sellers or find where sellers enter, it is increased to bring in (late) buyers. This is manipulation. The volume here is low however, as not many buyers enter.

 

2. Normal Up thrust. Here the bar is wide and the close is ideally up and on the low, but the volume is higher than the previous bar. In this case, the volume represents the herd entering long (buying) at the top when the actual direction the BBs intend to take the market is down. The herd will then have to sell at a loss which further fuels the down move.

 

Joel Pozen likes to say, "Buying does not cause rising prices; rising prices causes buying. Selling does not cause falling prices; falling prices causes selling". This is what the BBs understand and why the herd tends to buy tops and sell bottoms. The above quote fails to understand this aspect of human nature.

 

Now, as for the idea that strength enters on down bars. Down bars on heavy volume created by a "Bad news" event are used by the BBs to attract sellers (late) and price usually turns around and head up. In other words, the idea is to bring in sellers by lowering prices as opposed to find buyers. Again, this underscores what Joel says.

[Seb Manby 11]

Hi Candle W;

 

A good text well written, but you have missed a point, Upthrusts are also there to catch stops from other shorts who can also read the balance of supply and demand, especially those who got in too early, and it happens all the time, prices are moves around deliberately to process orders and to catch stops, also to hide professional strategy to manipulate prices to make a profit, as this is the objective of the professionals in the first place. It is a good point to note that the professionals are also trying to catch the other professional money out as well, you have to think of the market as a war zone where you do not have 2 opposing armies, just a free for all firefight where everyone is fighting everyone.

 

 

Regards Sebastian

[CandleWhisperer 10]

Thanks Seb. Good point . As VSAers we talk a lot about the BBs fighting the herd and tend to forget that they are fighting amongst themselves as well.

[CandleWhisperer 10]

.........In my view, a WRB simply shows a TEMPORARY imbalance between the bulls and bears. To have that followed up by a high volume hammer... WOW... can't ask for anything more.

 

 

Interesting take BF. WRBs represent a change in the supply/demand dynamic as well as so much more. They can play various roles. The attached chart shows WRBs playing multiple roles as the market transitions into an up trend.

 

However I want to focus here on the two tests.

 

Leaning Lesson:

 

Note this first test. This test is rather hard to see and would be missed by many (including some of the BBs). It is made easier for those who were predisposed to look to go long as part of a "fading the volatility spike" trade. The bar has a narrow range closing up and closes on the middle of its range on volume less than the previous two bars. Very tricky. In fact, many would be looking at this bar as a possible no demand until the next bar is up. As you can see price moved up from this test.

 

However the BBs are not sure if there is latent supply in the market. They have seen demand enter on both volatility spike and the next up bar. Yet, the nature of the test bar leaves something to be desired.

 

Now we skip to the second test. This is almost text book. It closes equal to the previous bar, has a narrower range, makes a lower low, and closes on its high. Two very important things about this test:

 

(1) Not only is the volume less than the previous two bars, but it is less than the previous test as well.

 

(2) This test trades back into the range of the body of the WRB but does not trade as low as the first test.

 

If there had been any doubt after the first test, its was all removed on the second one. This pattern actually repeats often and is very powerful. One test on low volume followed by another test with less volume than the first test and not trading as low as the first test.

[Sledge 13]

Sledge, I know it's not VSA per se but I think that's potentially a nice set up. A gentleman named Jason Jankovsky that I learned some good stuff from on price and volume told me that H & S is one of the best TA set ups. I don't monitor this market so I have no idea how it turned out. I have studied these and as I recall you want to see the neckline break on increasing volume and then a pullback on lower volume, possibly a no demand or combo no demand upthrust would be a nice potential set up. Anyway hope you made some $$$ if you took it.

 

I took a bit off it, but as it is panning out- it is not as strong of a drop as it should be- so it is very dangerous ground right now. Their is a major trendline right in about a 40 pip distance from the neckline and obviously as it rides up and down that trend line gets closer to the neckline.

 

It appears the trendline is holding- Everytime it breaks the trendline, it quickly retreats back into the trendline. So this may have a few downward gasps- but it is far from the monster drop H&S formations tend to bring.

 

I actually took a long this AM. Long at 1.9859

T/P Target 1.9884

 

It hit about 30 min ago or so.

Sledge