[VSA] Volume Spread Analysis Part II

[Eiger 10]

You guys really do have it down to a cracking good art (was that OK?) But, then again, it is your language. We yanks just borrowed it

[DbPhoenix 42]

What I find most confusing about any of these principles is applying them in a trade system. Today would be a good example. We clearly have support between 1367-68 in the mini-S&P, but the challenge is trying to figure out if it's going to hold and take off higher, or break-down. I'm sure there are clues but I'm not yet able to quantify them. It almost seems as though at some point you just have to take a gamble and hope your stop doesn't get nailed.

 

edit - I know the news pending (FOMC minutes) will be a big factor.

 

There's no need to worry about whether it's going to go up or down. Since the outcome of any given trade is unpredictable, your task is to figure the odds. This is done through (1) careful observation of the relationship between price and volume and (2) placing these observations in context.

 

If you're using bars, then you'll want to focus on the sort of bar that is the result of the volume, along with the spread of that bar. This in large part is the essence of volume spread analysis. But the "meaning" of this stew is dependent on the context. If, for example, you search for what are currently defined as "no demand" bars, you'll find loads of them. Which of them, if any, signifies buying exhaustion will depend entirely on the context, i.e., where the bar is located. Ignoring this means a lot of poor entries.

 

Today, for example, there were many opportunities to short on the way up for those who ignore resistance and volume. For those who incorporate both in their trading, the opportunities were very few, at least in the NQ. Without getting into all the quibbling about what is an "approved" bar interval and what isn't, the biggest volumes were at or around 10:20 and 10:50. At 10:20, however, price wasn't at resistance. By 10:50, it was. However, if one had shorted at or around 1862 and continued to be observant, he would have noted that volume was not picking up on the down side, and he would have kept his stop tight as price bounced off 1860.

 

On the other hand, when price then makes a higher high at or around 11:30, volume though higher is not anywhere near as high as it was during the previous swing high AND price drops below the high of the arc. This signals possible exhaustion. This therefore constitutes another place to short (which one might miss if he's still smarting over the previous trade and is no longer observant). One can also wait for a lower high, but unless he's using a 1m chart, or thereabouts, he's going to be entering near the midpoint of the range and will find himself in chop.

 

And for the most part, that's really all there is to it. Though one can complicate this to an extraordinary degree, there are very few principles and they are very simple. But if one cannot trust his own observations due to being concerned about being trapped by unseen forces that are plotting his downfall, he will find it next to impossible to learn and apply these principles in anything approaching a consistently profitable manner.

Edited April 8, 2008 by DbPhoenix

[DbPhoenix 42]

Indeed, I was just trying to clarify the time frame confusion. VSA is really a method of reading a chart, any chart that you can plot in a bar form with associated volume for the bars. Kruger seemed to add the multi time frame stuff (in a rather haphazard way I always thought) I don't think it is really 'core' methodology though there is a brief mention in the book from memory.

 

Picking suitable resolution chart(s) is important for most approaches imho.

 

Most VSA practitioners that I have come across enter on bar close. Sure this is an arbitrary construct but if that bothers anyone I suggest they make no such restriction, maybe use a pro rata volume indicator to help anticipate if the volume will be abnormal at close. By entering on close you are giving up trade location for more price confirmation. (as an aside I wonder generally how many trader trade on bar close?). Of course if this is the case picking a suitable periodicity is pretty important.

 

As for exits a variety have been discussed, the trite answer would be if long exit when weakness shows. Having said that the Undeclared Secrets was never a how to trade book it was more of a how to read the markets book. The same can not be said about the whole Tradguider offering and perhaps that adds to the confusion, their agenda seems simply to make as much from Tradguider and related merchandise as they can. Part of that merchandising is selling the whole how to trade package as far as I can tell. Having said that I don't own any of there stuff so can't really comment on how well it achieves that.

 

Yes, at some point, VSA became How To Use TradeGuider. This is why I think it's more important to talk about volume spread analysis the approach than VSA the system since VSA the system is all about TradeGuider, assuming of course that one wants to learn how to trade via the principles discussed in volume spread analysis (those who want "signals" are more likely to be attracted to VSA For Dummies, i.e., TradeGuider).

 

I discussed all this with the TG people five years ago and was impressed at the time by how little they understood the conceptual underpinnings of volume spread analysis. And now they've reached the point where volume plays such a minor role, one can hardly see it on the charts, a result I suppose of the effort to persuade potential buyers that TG can be used in any market, even those that don't provide volume at all.

 

Of course, if one wants to use this approach to scalp 5m bars, that's great as long as he can develop a consistently profitable strategy on this basis. However, volume spread analysis is much more than this.

[DbPhoenix 42]

Here's another example, Nvesta. Volume came pouring in around 14:10, i.e., professional support. Then a lower low was made on lower volume. And all this is taking place at the April lows. So do you go long here or not?

 

Edit (a half hour later): a moot question by now, perhaps, but do you see my point? Determine (1) where to look, (2) what to look for, (3) what you're going to do if and when you see it. If you don't know any of these things, at least you know where to begin.

Edited April 8, 2008 by DbPhoenix

[Eiger 10]

More buying came in on the news than selling -- at least initally -- and set up a Spring at support. The 10-min chart shows good demand off the support area.

 

On the 5-min chart, there was supply at S. Price went lower down to A, and then pushed up and closed above the previous bar. At B, the market gave us a down bar with volume less than the previous two bars - No Supply, and an immediate test of A. More significantly, I think, is that B and the first part of the next bar tested the high volume area at S and was unable to draw out any more supply. B was a good entry. Also, look at the closes on the bars in this area. All the bars from S through the bar after B are closing off their lows (except S). This looks like demand/big money has stepped in and bought. You can also see the good closes on the 10-min chart. As Tom Williams might say, If all that cracking good volume was supply, why weren't the closes on the lows?

 

Eiger

Edited April 8, 2008 by Eiger
Changed No Demand to No Supply - Duh!

[Eiger 10]

The NYSE Ticks can also be helpful in analyzing the ES market. I keep a 3-min chart (lowest time fram I use) with the NYSE Ticks under price & volume on my screen. You can see that as the market was making lows after the news release, the Ticks were rising. The rising Ticks indicated a significantly lessening selling pressure, which in this instance can be seen as a form of bag holding or buying into the herd's selling. Ticks can be useful in a variety of contexts, including diveregences like this. If you look back a few weeks into March, you will see a post I made about the Ticks and also a link to a basic instructional article on how to use them in your trading. They are useful to learn for day trading.

 

Eiger

 

Eiger

[Nvesta81 10]

Thanks for the input guys. It's making more sense little by little.

[Eiger 10]

Today was a down bar, narrow spread with a close in the middle on volume less than the previous two days. Still no supply has come in, and demand re-emerged in the afternoon. Still maybe premature to say this is absorption, but this day certainly does not disconfirm it.

[Ricks Inn 10]

Yes, at some point, VSA became How To Use TradeGuider. This is why I think it's more important to talk about volume spread analysis the approach than VSA the system since VSA the system is all about TradeGuider, assuming of course that one wants to learn how to trade via the principles discussed in volume spread analysis (those who want "signals" are more likely to be attracted to VSA For Dummies, i.e., TradeGuider).

 

I discussed all this with the TG people five years ago and was impressed at the time by how little they understood the conceptual underpinnings of volume spread analysis. And now they've reached the point where volume plays such a minor role, one can hardly see it on the charts, a result I suppose of the effort to persuade potential buyers that TG can be used in any market, even those that don't provide volume at all.

 

Just as an FYI, TradeGuider had a webinar this afternoon in which they turned all VSA indictors completely off (as well as the trend indictors for most of the time) while they traded the E-mini post-FOMC. Market was mostly ranging this afternoon, so both Gavin's live two-contract trades yielded small amounts (~$50 on one long and $87.50 on a short trade), though they were both profitable. But the principles of VSA seemed to me to work pretty well, at least to the extent that Tom and Sebastian understand them, and were explaining as they went along.

 

I may be wrong, but I think they are planning a similar event later this month showing how volume-based analysis applies to FOREX, too.

[DbPhoenix 42]

Just as an FYI, TradeGuider had a webinar this afternoon in which they turned all VSA indictors completely off (as well as the trend indictors for most of the time) while they traded the E-mini post-FOMC. Market was mostly ranging this afternoon, so both Gavin's live two-contract trades yielded small amounts (~$50 on one long and $87.50 on a short trade), though they were both profitable. But the principles of VSA seemed to me to work pretty well, at least to the extent that Tom and Sebastian understand them, and were explaining as they went along.

 

I may be wrong, but I think they are planning a similar event later this month showing how volume-based analysis applies to FOREX, too.

 

$50 and $87.50 with two contracts? At least they were profitable. But if VSA has been transformed into a scalping strategy, it's no wonder that so many people think "why bother?" There are much easier ways to scalp.

 

FYI, Wyckoff's take on this was as follows:

 

Tape reading is the art determining the immediate course or trend of prices from the action of the market as it appears on the tape. It aims to detect the moves that are likely to occur in the next few minutes

or hours

[emphasis mine], getting in when they begin and getting out when they culminate.

 

Now "culminate" can lead to some difficulties as there are many different views on when a move has "culminated". The MP approach, for example, allows for a much more substantial move. And many people use Wyckoff's advice to go for two or three points or even fractions of points as permission to scalp, or at least to take profits quickly, focusing on only the most trivial movements in the wave.

 

However, one must consider that the average daily range in 1931 was something like 5 points. Today it's over 200. Those little two-to-three point moves, therefore, become much larger.

 

Just something to think about.

Edited April 8, 2008 by DbPhoenix

[Ricks Inn 10]

$50 and $87.50 with two contracts? At least they were profitable. But if VSA has been transformed into a scalping strategy, it's no wonder that so many people think "why bother?" There are much easier ways to scalp.

 

I'm guessing it's just that during a live webinar there's no other type of trade they CAN show from beginning to end. Also, it supports the contention that VSA principles apply to "all markets in all timeframes". Seems like it's true -- from this sample of one, at least. I confess that I didn't see much that was tradable at all, so their coming out of this (admittedly demo-type) situation in the black was better than I would have done!

[DbPhoenix 42]

Sorry, RI. I edited my post while you were posting yours.

[BlowFish 10]

Without getting into all the quibbling about what is an "approved" bar interval and what isn't, the biggest volumes were at or around 10:20 and 10:50. At 10:20, however, price wasn't at resistance. By 10:50, it was.

 

Hope you don't think this is quibbling however I think an important point is being obscured maybe as I am not making it particularly well. My point is that certain resolution tools would have made that observation easier. No dogma no "approved" bar. Let me ask what resolution 'tool' you used to observe these bigger volumes at 10:20 & 10:50. I would guess maybe a 1 3 or 5 minute chart would allow you to spot the shift pretty clearly. Or a similar tick chart. I guess that there are a few (very few) that could observe it from time & sales data only. I would suggest even if you are observing in real time and know exactly what you are looking for it would have been tough to spot on an hourly+ bar being as both events would have occurred within the same bar. Elephant gun for elephants and a small bore for rabbits.

 

As an aside I am not sure where this idea of an "approved" size comes from, (I hope not from me). VSA is the same as many things 'any instrument any time frame' of course Tom added 'as long as there is volume reported'.

[dandxg 10]

The NYSE Ticks can also be helpful in analyzing the ES market. I keep a 3-min chart (lowest time fram I use) with the NYSE Ticks under price & volume on my screen. You can see that as the market was making lows after the news release, the Ticks were rising. The rising Ticks indicated a significantly lessening selling pressure, which in this instance can be seen as a form of bag holding or buying into the herd's selling. Ticks can be useful in a variety of contexts, including diveregences like this. If you look back a few weeks into March, you will see a post I made about the Ticks and also a link to a basic instructional article on how to use them in your trading. They are useful to learn for day trading.

 

Eiger

 

Eiger

 

Thanks for posting that $tick. I just got my DTN IQ with market internals so I want to try filter trades with either tick extremes or tick divergences as you posted. Just to see if it gives me an edge. Good trading to all.

[DbPhoenix 42]

Hope you don't think this is quibbling however I think an important point is being obscured maybe as I am not making it particularly well. My point is that certain resolution tools would have made that observation easier. No dogma no "approved" bar. Let me ask what resolution 'tool' you used to observe these bigger volumes at 10:20 & 10:50. I would guess maybe a 1 3 or 5 minute chart would allow you to spot the shift pretty clearly. Or a similar tick chart. I guess that there are a few (very few) that could observe it from time & sales data only. I would suggest even if you are observing in real time and know exactly what you are looking for it would have been tough to spot on an hourly+ bar being as both events would have occurred within the same bar. Elephant gun for elephants and a small bore for rabbits.

 

As an aside I am not sure where this idea of an "approved" size comes from, (I hope not from me). VSA is the same as many things 'any instrument any time frame' of course Tom added 'as long as there is volume reported'.

 

It's not quibbling at all, Blowfish. But I use a 1m chart, and the opinion has been expressed that anything under 5m is not "VSA". Of course, if one's datafeed and charting program are good enough, even a 1s chart can be "VSA", assuming that one understands the central concepts of volume spread analysis.

 

As for the 5m, it might be more difficult to distinguish the potential selling climax from the retest, which is one reason why I use the 1m. T&S? I suspect one would have to be very good to detect the above. But that's one reason why Wyckoff used a type of P&F notation method while he was reading the tape. I prefer a plain ol' bar chart since it's now available for intraday. And as for the hourly bar, by the end of the bar, the whole thing would be over.

 

This is not to say that one must use teeny tiny intervals in order to "catch the wave". After all, this originated with EOD charts, and EOD charts have their own wave patterns. But if one is going to be out by the end of the day, and if one wants to make the most of whatever movements occur, a 60m bar presents certain challenges. For myself, I want to enter when I see the turn. Sometimes I don't see it. But either way, I don't see the advantage in waiting. As I've said before, the more confirmation one requires, the less likely he is to get the best price. It's a trade-off that depends on one's goals, what he's willing to risk, and what kind of risk he's willing to assume.

[gassah 10]

Thanks for the post. What are your thoughts?

Eiger

 

Hi Eiger,

 

In Wyckoff's course he states "It (the trend) is the most important thing to know about the market or an individual stock." Since the intermediate trend is down I'm looking to short near the top of the range. The spring and the strong response to it the next day suggested a move to the top of the range. The rally hasn't been impressive so I don't see any reason to change the plan. If it does jump I'll make it prove itself more than I would a downside break because the counter-trend breaches are more likely to fail.

 

nic

[DbPhoenix 42]

Blowfish, referring back to post 940, the charts below may help illustrate.

 

The first is the day's short entry. Note the lower volume on the attempt to make a higher high. Also note the tick divergence.

 

 

This is the day's bottom. Note here the difference in volume.

 

 

One must have the patience to wait, of course, but there's really nothing I can do about that.

 

The most important advantage of a combination of tape reading and trading for the longer swings is that it will aid you in increasing your profits by making your trade at the most favorable moment with a small risk, then letting your profit run into the probable distance indicated by the longer swings. (Wyckoff)

 

.

[Sledge 13]

Hi Eiger,

 

In Wyckoff's course he states "It (the trend) is the most important thing to know about the market or an individual stock." Since the intermediate trend is down I'm looking to short near the top of the range. The spring and the strong response to it the next day suggested a move to the top of the range. The rally hasn't been impressive so I don't see any reason to change the plan. If it does jump I'll make it prove itself more than I would a downside break because the counter-trend breaches are more likely to fail.

 

nic

 

Nic-

You seem to have a very keen insight, I hope you may come to this thread and possibly give more analysis on either posts of your own or other traders posts. It appears you have a nice grasp on the thread subject matter that I know I would like to hear more of!

Sledge

[CandleWhisperer 10]

Today was a down bar, narrow spread with a close in the middle on volume less than the previous two days. Still no supply has come in, and demand re-emerged in the afternoon. Still maybe premature to say this is absorption, but this day certainly does not disconfirm it.

 

It's a possible test. We would want to see a higher close in the next two bars without a lower low then the test bar.

[CandleWhisperer 10]

Just as an FYI, TradeGuider had a webinar this afternoon in which they turned all VSA indictors completely off (as well as the trend indictors for most of the time) while they traded the E-mini post-FOMC. Market was mostly ranging this afternoon, so both Gavin's live two-contract trades yielded small amounts (~$50 on one long and $87.50 on a short trade), though they were both profitable. But the principles of VSA seemed to me to work pretty well, at least to the extent that Tom and Sebastian understand them, and were explaining as they went along.

 

I may be wrong, but I think they are planning a similar event later this month showing how volume-based analysis applies to FOREX, too.

 

 

KEEP UP THE GOOD WORK LADIES AND GENTS!! TG would never say it, but the recent new emphasis on "no red/green signs or indicators" is partially due to the two threads here. I have been waiting for an webinar like this, hope it got taped.

[CandleWhisperer 10]

I'm not here to be some champion of VSA- I agree with it and adhere to it. It has served me well. Other than that, I don't feel I have to justify anything else.

 

Sledge

 

Why not? Champion on. VSA has served you well and it will serve others in kind. Is it the only way to trade? No. But it is a darn good one.

 

Keep up the good work. There will always be detractors.

[Eiger 10]

Hi Eiger,

 

In Wyckoff's course he states "It (the trend) is the most important thing to know about the market or an individual stock." Since the intermediate trend is down I'm looking to short near the top of the range. The spring and the strong response to it the next day suggested a move to the top of the range. The rally hasn't been impressive so I don't see any reason to change the plan. If it does jump I'll make it prove itself more than I would a downside break because the counter-trend breaches are more likely to fail.

 

nic

 

Yup, all excellent points and the main weaknesses of this rally and the view for absorption and higher prices. As you have gotten me to think more about this, I do wonder why Wyckoff chose the 1931 bear market rally as the market period to show rally behavior, as it would have gone against the main trend. I guess we'll never know.

 

Someone made a post above encouraging you to participate more in this thread. I'd second that. I, too, like your clear thinking. I hope you do join in.

 

Eiger

Edited April 9, 2008 by Eiger

[gassah 10]

I hope you do join in.

 

Thanks, guys. I'm finding TL filled with quality information and hope it's mutually beneficial.

 

nic

[Bearbull 10]

Thanks, guys. I'm finding TL filled with quality information and hope it's mutually beneficial.

 

nic

 

It should be mutually beneficial, know that you have a good handle on Wyckoff principles and understand VSA, so your input is always greatly appreciated.

 

It is heartening to learn that it is the pressure brought about on TG folks from the posts here that has compelled them to drop all those indicators on their charts during their recent webinar presentations and focus more on VSA principles which as has been stated previously are in part consistent with those of Wyckoff.

Now eagerly awaited by the VSA trading community is the long awaited upgrade of their Tradeguider charting software, which they have been promising since 2002, hopefully after they have collected over $700k or more from the 3 weekend Webinars in posh hotels in Chicago, Las Vegas and London:rofl:

[tawe trader 10]

As I haven't posted for a while, I thought I would post a couple of charts from this weeks FTSE Future, if only to show how I nearly messed up a good trade.

 

The first chart is the daily chart and as you can see the FTSE has had a good rally recently but the volume is poor, there was a no demand bar last Friday and the mkt rose again on the Monday on ever so slightly higher volume.

 

The next chart is Monday's 60 min, as you can see the mkt closed up again, finishing with a wide spread up bar on high volume. After seeing this I decided to go for an overnight short trade.

 

The last chart is from yesterday and the mkt did indeed fall and my trade went into profit. My mistake here was not taking the good gains and exiting near the lows of the day (S2 support). My greed emotion had kicked in and I held on, in the hope for (wrong I know) a bigger swing of pts. By the close I had given back a fair few pts.

 

Later on in the evening with my FTSE short still open I watched the US mkts during the FOMC minutes announcement. The FTSE trades pretty much in parallel to the US mkts and as you know the ES declined down to support (and dragged the after-hrs FTSE down with it) after the FED minutes were announced. After seeing the high volume down bars on the ES (which Eiger has explained in more detail on his post #930) the mkt looked quite bullish, so I decided not to risk anymore upside and I exited my FTSE short around 7.30pm last night (2.30pm US). This turned out to be the correct decision, as it was pretty much the low of the afternoon US session.

 

I think the lesson here (to myself and anyone else who struggles with exits) is that even though I was correct in my mkt analysis and entry, the hardest part is knowing when to exit. In this case due to the greed factor, it could have quite easily gone from a very good, profitable trade, back to a breakeven trade. In the end in turned out ok, thankfully.

 

Regards

Tawe

.