[VSA] Volume Spread Analysis Part II

[DbPhoenix 42]

 

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

.

 

Seems the hard part here lay not in not knowing when/where to exit but in doing it. If you're daytrading, logical support was at the top of that range extending across the 3rd and 4th, so you had your line drawn correctly for that. If you're trading for the very short term, consider using a smaller bar interval, e.g. 15m, to put yourself closer to the action. This may help you manage your emotions more effectively.

 

Glad it turned out well.

[tawe trader 10]

DB, thanks for the advice.

 

You are correct in saying that the hard part is in the doing, not the knowing. I had a bit of a idea beforehand of where to exit (around S2) and/or previous resistance but I didn't get out there and this time I was lucky to come away with something. Another lesson learnt (hopefully) for me.

 

 

Cheers

Tawe

[DbPhoenix 42]

DB, thanks for the advice.

 

You are correct in saying that the hard part is in the doing, not the knowing. I had a bit of a idea beforehand of where to exit (around S2) and/or previous resistance but I didn't get out there and this time I was lucky to come away with something. Another lesson learnt (hopefully) for me.

 

 

Cheers

Tawe

 

There was a time -- not uncommon among traders, beginner and experienced alike -- when I thought I knew more than the market and got caught in a cycle of pressing, both to the upside and to the down. Eventually, the only thing that broke me out of it was to stop trading entirely and become reacquainted with the market by just watching it. When I saw the regular and continuing journey from support to resistance (just like the books had said) and followed it long enough to trust it (this took far longer than you'd believe), I began to accept that the market didn't give a damn what I wanted and it was going to follow this cycle regardless of what I thought about it.

 

So I learned how to hop on that bus and travel that route between support and resistance. I also learned how to determine when the bus had decided to extend its route, drive through town, and move on to a further destination. Most of all, I accepted the fact that I wasn't the driver; I was a passenger. Nor did I nag the driver to turn around, much less pull out a gun and threaten him. (I also learned not to jump off the bus every time it slowed down at a turn, fearful that it would not reach its destination; every time I did, I was left in the middle of nowhere, watching the bus move on without me.)

 

But it's difficult to learn these lessons if one continues to trade in the meantime. If one is in a trade, then being right becomes a factor, and it's difficult to negotiate the turns when one is pushing his ego around in a wheelbarrow.

 

So keep your eye on those turning points. They don't just crop up like crocuses in Spring. They're created by buyers and sellers. And give it time.

Edited April 9, 2008 by DbPhoenix

[Eiger 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

.

 

Hi Tawe,

 

I thought you had a nicely constructed trade - good reading of the market, using the higher time frame for background & S/R, and pulling the trigger at the right time. Nice job, too, on connecting the US market activity with your trade. Well done!

 

Exits do seem to be more difficult than entries, don't they? I wonder if it is because we put a lot of effort and care into analyzing the market for the entry, and not so much for the exit. I know when I don't plan out my exit for at least partial profits, my mind will take over when in the trade and start talking at me saying, "Get out!" or "Stay in!", depending on whether fear or greed is the "emotion of the moment."

 

There is no doubt trading can produce stress. When we are under stress, our cognitive abilities plummet (its a natural part of the stress response). In a way, the more stressed or anxious we become, the more stupid we become. That's a good psychological reason to have a plan about trade objectives (as well as firm stops). It helps keep us more objective, rather than responding to our thoughts driven by the emotion of the moment.

 

Pivots become more potent when connected with S/R. There was a small support zone where I think your pivot was located that the FTSE reached before turning up. I like to highlight the nearby supports and try to incorporate them into the exit plan.

 

Great post, Tawe!

 

Eiger

[Anna-Maria 10]

That's a damn fine post DBPhoenix

 

Your blog makes for good reading too.

[Eiger 10]

I just got a copy of Richard Ney's Wall Street Jungle. Here's the opening line:

 

"Most of us enter the investment business for the same sanity-destroying reasons a woman becomes a prostitute: it avoids the menace of hard work, is a group activity that requires little in the way of intellect, and is a practical means of making money for those with no special talent for anything else."

 

This really should be a cracking good read

[jjthetrader 10]

 

There is no doubt trading can produce stress. When we are under stress, our cognitive abilities plummet (its a natural part of the stress response). In a way, the more stressed or anxious we become, the more stupid we become. That's a good psychological reason to have a plan about trade objectives (as well as firm stops). It helps keep us more objective, rather than responding to our thoughts driven by the emotion of the moment.

 

Eiger

 

Good point Eiger. There was a study done on this in school age children and how the stress of testing actually made them 'stupid'. The fight or flight response actually diverts reasoning to our most primitive part of the brain.

It was good of you to bring this up in relation to planning our trade out so we don't have to think while we're in a trade. "Stick to the plan."

 

Tawe, great trade. Your VSA reading skills are excellent. When we get in on a VSA signal we often want to get out on a VSA signal so I see why you did what you did. You had no 'real' reason to get out other than S&R and since you're a longer term trader I think you're on the right track. You're trading your style and I think that's the most important thing.

[Sledge 13]

There was a time -- not uncommon among traders, beginner and experienced alike -- when I thought I knew more than the market and got caught in a cycle of pressing, both to the upside and to the down. Eventually, the only thing that broke me out of it was to stop trading entirely and become reacquainted with the market by just watching it. When I saw the regular and continuing journey from support to resistance (just like the books had said) and followed it long enough to trust it (this took far longer than you'd believe), I began to accept that the market didn't give a damn what I wanted and it was going to follow this cycle regardless of what I thought about it.

 

So I learned how to hop on that bus and travel that route between support and resistance. I also learned how to determine when the bus had decided to extend its route, drive through town, and move on to a further destination. Most of all, I accepted the fact that I wasn't the driver; I was a passenger. Nor did I nag the driver to turn around, much less pull out a gun and threaten him. (I also learned not to jump off the bus every time it slowed down at a turn, fearful that it would not reach its destination; every time I did, I was left in the middle of nowhere, watching the bus move on without me.)

 

But it's difficult to learn these lessons if one continues to trade in the meantime. If one is in a trade, then being right becomes a factor, and it's difficult to negotiate the turns when one is pushing his ego around in a wheelbarrow.

 

So keep your eye on those turning points. They don't just crop up like crocuses in Spring. They're created by buyers and sellers. And give it time.

 

Wow! What a post! A beautiful statement for beginners to print, read and re-read, and for any "seasoned" trader to do the same.

Very well put, very well articulated!

Sledge

[BlowFish 10]

That's a damn fine post DBPhoenix

 

Your blog makes for good reading too.

 

Yes indeed, right up there with the one found here Many pearls beeing cast before us swine http://www.traderslaboratory.com/forums/f37/re-is-trading-just-another-road-3712.html#post33723

[zeon 10]

This is how I look at today (uptil now):

 

Pink line is support. It's about 1825 on the NQ, but this is a QQQQ chart.

Anyhow:

 

(a) selling climax

(b) a lower low but on lower volume ànd the bar noticeable closes at the high, hower price is still below the trendline

© the trendline I've drawn is broken, and there's a tiny little bar on very little volume => no supply?

(d) volume picks up when price moves higher

(e) volume confirms selling is done, price rises nicely, bar closes near the high and up we go

 

Now the problem is... (e) would be a clear long signal for me, because

(1) the downtrend is broken

(2) there was a lower low but on lower volume

(3) all this happened at support

(4) there was a 'no supply' bar

(5) price rises on the way up

 

But here I am, down the same road again, price goes back to support and I'm out with a loss :-/

[Eiger 10]

I think your trendlines could be adjusted. E looks like it is going into the supply line. Plus, there is a larger downtrend than just today (see 30-min chart).

[DbPhoenix 42]

This is how I look at today (uptil now):

 

Pink line is support. It's about 1825 on the NQ, but this is a QQQQ chart.

Anyhow:

 

(a) selling climax

(b) a lower low but on lower volume ànd the bar noticeable closes at the high, hower price is still below the trendline

© the trendline I've drawn is broken, and there's a tiny little bar on very little volume => no supply?

(d) volume picks up when price moves higher

(e) volume confirms selling is done, price rises nicely, bar closes near the high and up we go

 

Now the problem is... (e) would be a clear long signal for me, because

(1) the downtrend is broken

(2) there was a lower low but on lower volume

(3) all this happened at support

(4) there was a 'no supply' bar

(5) price rises on the way up

 

But here I am, down the same road again, price goes back to support and I'm out with a loss :-/

 

Take care not to learn the wrong lessons. You are correct in nearly everything you've done, though you should note that the 09:55 bar is also climactic, an example of buying support coming into the market. Whether it's genuine or not is unimportant at the time because you're waiting for support at 1825, as you should. And when it turns out that the buying "support" seems more likely to have been a feint to lure the vague into going long (note the character of the bar at the top of that arc and the volume which accompanies it), you don't care because you weren't there.

 

You then near support and another potential selling climax. This is tested as you note. But you're overlooking the bar between b and c. This is an important one in that it is here, along with b, that the shift from supply to demand takes place. "C", however, is not "no supply"; it's "no demand", though not the way VSA defines it. Note what happens to price in the next bars (better "no supply" bars are at 12:55 and 13:00).

 

As for "e" and the seeming long signal, it does seem as though selling is done and the way is clear for the upside. However, you're not using trendlines; you're using supply lines. A trendline would be drawn from one of two places, either from the top of the 09:35 bar or from the top of the 10:20 bar. If drawn from the former, price "rides" this line from 12:25 onward. If drawn from the latter, the line is never broken, at least on your chart.

 

Eventually, of course, both lines are broken, at 13:10, after your chart (note the volume on the 13:05 bar). So you have to ask yourself if your stop was too tight, if keeping it tight and standing aside for a possible second entry or a short entry on a break below support is a better choice, or if waiting for more confirmation for a long entry is called for. The choice you make will depend on your skill at reading the action and the amount of risk you're willing to assume.

Edited April 9, 2008 by DbPhoenix

[zeon 10]

I think your trendlines could be adjusted. E looks like it is going into the supply line. Plus, there is a larger downtrend than just today (see 30-min chart).

 

Thanks Eiger. But this doesn't really change the fact, on your left hand chart (QQQQ 5-min) the trendline remains broken. And if you're trading off 5-minutes or lower you can't really use trendlines on a higher timeframe right? At least it doesn't seem logical to me.

 

Meanwhile however price has gone up from 1825 to 1834. So it's going up like it should - according to the reasons/signals stated in my previous post.

 

So why I am still not making money of it. :\

[zeon 10]

Take care not to learn the wrong lessons. You are correct in nearly everything you've done,...

 

Thanks, I suppose I'm making some progress then after all.

 

...though you should note that the 09:55 bar is also climactic, an example of buying support coming into the market. Whether it's genuine or not is unimportant at the time because you're waiting for support at 1825, as you should. And when it turns out that the buying "support" seems more likely to have been a feint to lure the vague into going long (note the character of the bar at the top of that arc and the volume which accompanies it), you don't care because you weren't there.

 

This is an example of where I ask myself, why is there huge volume at this particular price level ('a' on the attached chart). It's not on support, yet the market moves up after it and the bar closes way off the lows. Who is buying this then? The bar is climatic, so professional money is supporting the market here, right? Perhaps the 'smart money' isn't always that smart then.

 

You then near support and another potential selling climax. This is tested as you note. But you're overlooking the bar between b and c. This is an important one in that it is here, along with b, that the shift from supply to demand takes place. "C", however, is not "no supply"; it's "no demand", though not the way VSA defines it. Note what happens to price in the next bars (better "no supply" bars are at 12:55 and 13:00).

One thing is not clear in this, 'not the way VSA defines it'. How is 'no demand' defined then, I mean, it can occur at support as well at at resistance, not?

 

As for "e" and the seeming long signal, it does seem as though selling is done and the way is clear for the upside. However, you're not using trendlines; you're using supply lines. A trendline would be drawn from one of two places, either from the top of the 09:35 bar or from the top of the 10:20 bar. If drawn from the former, price "rides" this line from 12:25 onward. If drawn from the latter, the line is never broken, at least on your chart.

 

I can see that now. In fact, price is only broken later and that looks like the real 'long signal'. It's also accompagnied by a rise in volume ('b').

 

Eventually, of course, both lines are broken, at 13:10, after your chart (note the volume on the 13:05 bar). So you have to ask yourself if your stop was too tight, if keeping it tight and standing aside for a possible second entry or a short entry on a break below support is a better choice, or if waiting for more confirmation for a long entry is called for. The choice you make will depend on your skill at reading the action and the amount of risk you're willing to assume.

 

Normally, I would set a stop below support. But given the conditions I've mentioned, I assumed price should now move up and if it doesn't straight away I am obviously wrong. It looks like 'c' is another entry possibility in case the first long was missed. The volume after 'b' than declines when turning lower but rises again on 'c'.

[Bearbull 10]

Thanks Eiger. But this doesn't really change the fact, on your left hand chart (QQQQ 5-min) the trendline remains broken. And if you're trading off 5-minutes or lower you can't really use trendlines on a higher timeframe right? At least it doesn't seem logical to me.

 

Meanwhile however price has gone up from 1825 to 1834. So it's going up like it should - according to the reasons/signals stated in my previous post.

 

So why I am still not making money of it. :\

 

Attached is the trendline on the same chart, now read post 941

 

"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."

 

Next go back to your current chart.

If you trading off a 5min chart, your focus has to be on that, entry/risk/target, any tested setup/tactics on 5min is not going to work on 15min , both stop loss/target obviously will be different. However the intermediate trend can be determined from 15min or even 30min and then you can look for high probability trades on 5min consistent with the trend as per wyckoff (posted by gassah in 941)

[DbPhoenix 42]

This is an example of where I ask myself, why is there huge volume at this particular price level ('a' on the attached chart). It's not on support, yet the market moves up after it and the bar closes way off the lows. Who is buying this then? The bar is climatic, so professional money is supporting the market here, right? Perhaps the 'smart money' isn't always that smart then.

 

It may be stupid. It may also be a ploy on someone's part to lure ignorant buyers into buying off what they think is a reversal. It doesn't matter since you're no longer ignorant and you're waiting for your spot.

 

One thing is not clear in this, 'not the way VSA defines it'. How is 'no demand' defined then, I mean, it can occur at support as well at at resistance, not?

 

"No demand" is defined in different ways by different people. At its simplest, it means a lot of volume and price isn't going anywhere, in this case, up. Granted demand kicks in later, but you have no way of knowing that at the time.

 

Normally, I would set a stop below support. But given the conditions I've mentioned, I assumed price should now move up and if it doesn't straight away I am obviously wrong. It looks like 'c' is another entry possibility in case the first long was missed. The volume after 'b' than declines when turning lower but rises again on 'c'.

 

This is another reason why I suggested you stop trading until you get all this worked out. You weren't necessarily "wrong"; you may only have been early. Nail the entries first, on paper. Worry about stops later. There's no way in hell you're going to be able to place an intelligent stop if you're trading scared or as a defeatist.

[zeon 10]

All off this is on paper, since I stopped trading with real money.

 

But suppose I wasn't stopped out on my long and I would be in, then I would be looking for price to go back up to resistance. But then I noticed price suddenly reversing sharply at 1835. First I thought there was news, but then I thought of something dbphoenix talked about in his blog: the midpoint.

 

Wow, this stuff is pretty amazing. 1835 is right in the middle of support (1825) and the peak where I started drawing my trendline 1845. Or perhaps it's just all a coincidence...

[DbPhoenix 42]

Attached is the trendline on the same chart, now read post 941

 

"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."

 

Next go back to your current chart.

If you trading off a 5min chart, your focus has to be on that, entry/risk/target, any tested setup/tactics on 5min is not going to work on 15min , both stop loss/target obviously will be different. However the intermediate trend can be determined from 15min or even 30min and then you can look for high probability trades on 5min consistent with the trend as per wyckoff

 

I hope you don't mind a few quibbles, Bearbull.

 

First, trading "trend" off a bar interval that takes one outside the day's timeframe is problematic with futures since one is either eliminating two-thirds of the trading day, which on the face of it makes interday trendlines meaningless, or one is including the overnight, in which case the trendlines are relatively useless. More important is the relationship of the opening price with, to start, the previous day's high, low, and close, though there may be zones in the previous day that trump all this. Using an intraday trendline such as the one you've provided will be far more reliable.

 

Second, focusing on the 5m does not mean that the focus need remain there. As I quoted in an earlier post,

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)

 

In other words, get the entry off the 5m, if that's the preferred interval, then, once it's got gas, look to the larger intervals to manage the trade. To do otherwise is to be often limited to scalping.

 

Third, the "Wyckoff" quote that you provided doesn't sound like him, except perhaps the first sentence. Could it be SMI instead?

[DbPhoenix 42]

All off this is on paper, since I stopped trading with real money.

 

But suppose I wasn't stopped out on my long and I would be in, then I would be looking for price to go back up to resistance. But then I noticed price suddenly reversing sharply at 1835. First I thought there was news, but then I thought of something dbphoenix talked about in his blog: the midpoint.

 

Wow, this stuff is pretty amazing. 1835 is right in the middle of support (1825) and the peak where I started drawing my trendline 1845. Or perhaps it's just all a coincidence...

 

While you're pouring over all of this, you must also consider what you'd be doing if you were or had been short, as you should have been. Is all of this enough to cover the short? Or would you be holding on for the next level of potential support?

[Bearbull 10]

All off this is on paper, since I stopped trading with real money.

 

But suppose I wasn't stopped out on my long and I would be in, then I would be looking for price to go back up to resistance. But then I noticed price suddenly reversing sharply at 1835. First I thought there was news, but then I thought of something dbphoenix talked about in his blog: the midpoint.

 

Wow, this stuff is pretty amazing. 1835 is right in the middle of support (1825) and the peak where I started drawing my trendline 1845. Or perhaps it's just all a coincidence...

 

 

How about previous support , now acting as resistance.

Now note the price action via say 2min or 1min chart at that level.

 

Read post 927 and 942 by Dbphoenix for more info.on context.

[DbPhoenix 42]

How about previous support , now acting as resistance.

Now note the price action via say 2min or 1min chart at that level.

 

Read post 927 and 942 by Dbphoenix for more info.on context.

 

You two are asking good questions, but I'm not sure that this is VSA. Nic (gassah) and I are thinking of opening up a Wyckoff thread in order to keep all of this from getting tangled. Yes, it's all about price action, but addressing several approaches simultaneously can be unnecessarily confusing.

[zeon 10]

While you're pouring over all of this, you must also consider what you'd be doing if you were or had been short, as you should have been. Is all of this enough to cover the short? Or would you be holding on for the next level of potential support?

 

After a bit of self-reflection I've come to the conclusion that I prefer to exit on the first warning signal. Even though this might not be the end of the move, I'd definitely want to lighten my position. For example today - presuming I would be short - I would have taken off some contracts when price reached 1825. Later, when it failed to make a lower low AND broke the downtrendline, I would've exited my whole position.

 

Then there's also the third option, exiting completely and reversing... but I don't think I'm quite ready for that yet.

[DbPhoenix 42]

After a bit of self-reflection I've come to the conclusion that I prefer to exit on the first warning signal. Even though this might not be the end of the move, I'd definitely want to lighten my position. For example today - presuming I would be short - I would have taken off some contracts when price reached 1825. Later, when it failed to make a lower low AND broke the downtrendline, I would've exited my whole position.

 

Then there's also the third option, exiting completely and reversing... but I don't think I'm quite ready for that yet.

 

Although there's another option. Rather than cashing in some of your position at a predetermined target (the market doesn't care where you entered or what your target is), let the market tell you where to lighten up, i.e., however you've defined a reversal signal. This enables you to keep some in reserve in case the market decides to breach support and continue its declne.

[zeon 10]

Although there's another option. Rather than cashing in some of your position at a predetermined target (the market doesn't care where you entered or what your target is), let the market tell you where to lighten up, i.e., however you've defined a reversal signal. This enables you to keep some in reserve in case the market decides to breach support and continue its declne.

 

 

It looks like we just went below that 1825 support. I'm not sure if I understand the option you suggest correctly. Are you saying it would be smart to leave some reserve open, like in today's situation, despite (a) the failure to make a lower low (b) the trendline breach and © the reversal signal? Looks to me like you'd have to let price travel back to your entry point for at least 10 points.

[DbPhoenix 42]

It looks like we just went below that 1825 support. I'm not sure if I understand the option you suggest correctly. Are you saying it would be smart to leave some reserve open, like in today's situation, despite (a) the failure to make a lower low (b) the trendline breach and © the reversal signal? Looks to me like you'd have to let price travel back to your entry point for at least 10 points.

 

There are many options for managing a trade, and the choice of options one makes depends on how well he understands what's in front of him, what he wants for himself, how much he's willing to risk, and how many contracts/shares he's trading.

 

If, for example, one is trading one contract, he should trade it as if he were trading four, taking the profits on that one contract wherever he'd be taking those profits, then trading the other three on paper, exiting each at a predetermined signal. If he tries to make the most out of that one contract, he will end up taking profits very quickly, if there are any, or letting the one contract come back all the way to breakeven just because he was hoping it would travel all the way to the next support or resistance level and it reversed instead.

 

This approach requires a certain emotional maturity. If one can't view this as training for bigger rewards down the road and patiently keep his eye on the prize, he will very likely end up on a treadmill instead.