[VSA] Volume Spread Analysis Part II

[Bearbull 10]

Eiger, you did great, no need to beat up yourself, you managed to identify the entries and pulled the trigger, that in itself is some achievement. You do not need home runs, increase contract size and aim for fixed points. Also have a look at other markets which are less spikey, NQ, Russell for instance.

[DbPhoenix 42]

 

This morning, for example, I totally missed the first run up in the ES on the 5-minute chart, even though a long trade was readable from the chart.

 

Very interesting, partly in how we viewed the same information somewhat differently. I took only four trades -- two shorts and two covers -- in this timeframe (on the NQ, but the pattern was essentially the same). I shorted just before 1000 due to the test of S/R, even though this was just before a news release, and lost a few points. But then I did nothing more until your A, shorted again, and held it until it hit and bounced off a lower support level at your 3/4.

 

The difference? I suppose it's largely due to the reliance -- or lack thereof -- on bars, and to differences in where one locates S/R. (Also in the fact that I like to be done by lunch . . . )

Edited March 3, 2008 by DbPhoenix

[erierambler 10]

Very interesting, partly in how we viewed the same information somewhat differently. I took only three trades in this timeframe (on the NQ, but the pattern was essentially the same). I shorted just before 1000 due to the test of S/R, even though this was just before a news release, and lost a few points. But then I did nothing more until your A, shorted again, and held it until it hit and bounced off a lower support level at your 3/4.

 

The difference? I suppose it's largely due to the reliance -- or lack thereof -- on bars, and to differences in where one locates S/R. (Also in the fact that I like to be done by lunch . . . )

 

Well , I viewed it probably different as well, only took 2 trades (both long). It might have to do with our maps , only looking for information that is necessary and efficient ( Magee )

I must be missing a third somewhere . I'll keep looking

 

erie

[zeon 10]

You are right about that. Stragedy is rarely discussed. I used to think (and trade) that all I needed was a climax for entry and a climax for exit. Many, many losses later ...

 

Eiger

 

First of all thanks Eiger for posting such a comprehensive review of your trades today. I'm really starting to like this forum. You guys are giving away a lot of quality information for free. I actually took three shorts today, but all of them got stopped out at breakeven.

 

Eiger, you did great, no need to beat up yourself, you managed to identify the entries and pulled the trigger, that in itself is some achievement. You do not need home runs, increase contract size and aim for fixed points. Also have a look at other markets which are less spikey, NQ, Russell for instance.

 

Bearbull, you are entirely right one does not need homeruns, but an exit too soon or too late nevertheless can (and often is for me) a cause of frustration.

 

Very interesting, partly in how we viewed the same information somewhat differently. I took only four trades -- two shorts and two covers -- in this timeframe (on the NQ, but the pattern was essentially the same). I shorted just before 1000 due to the test of S/R, even though this was just before a news release, and lost a few points. But then I did nothing more until your A, shorted again, and held it until it hit and bounced off a lower support level at your 3/4.

 

What a coincidence! I took three shorts actually, and I think one of them must have been very similar to yours (although on the ES) as I got stopped out too on the news. Unfortunately, my short from some time later didn't make much profit neither as I saw price return to my entry before I managed to take profits :doh: Now I'm looking at my chart and see all my shorts were around the high of the day, and if I left a trade open till now I'd have a nice profit. Instead I have zip for the day

 

I'll see if I can come up with a chart to illustrate the problem. It's cool that we are all talking about today's trades.

[DbPhoenix 42]

Well , I viewed it probably different as well, only took 2 trades (both long). It might have to do with our maps , only looking for information that is necessary and efficient ( Magee )

I must be missing a third somewhere . I'll keep looking

 

erie

 

Days like today require a degree of patience that is almost more than I'm capable of. The "support and resistance levels" that I'm using are from points and levels that are from 1-4 weeks old, so I don't have a huge amount of confidence in them and have to be especially attuned to what traders are doing at each of these levels. But I've learned to ignore everything that doesn't take place at S or R, so I ignore moves "against" me that don't take place at or near some important level. Price, after all, does go up and down.

[zeon 10]

First arrow: I opened a short before the market opened because price was hovering around ressitance and I didn't want to wait any longer. A signal is a signal, right? That one got stopped out because the news caused price to spike up.

 

Ok next arrow: I shorted on the first spike at resistance. I've found there's often a reversal after news, so I considered this a good signal. I could not really see a reason to exit so I moved my stop up to below the pink line after price plunged and walked away. When I came back I saw my stop hit

 

Third arrow is another short on what looks like a head & shoulder formation. I figured this to be a pretty good opportunity to take on another short and went along, only to get stopped out with a small loss about 30 minutes later (price spike up to the pink line).

 

The final short is one I took on the way down. I figured this time price really had to plunge hard. I moved my stop to breakeven on the next bar, I really wanted to lock in those profits this time instead of letting them fly. But 15 minutes later a spike stopped me out. So this is the story of my day... pretty decent entries in hindsight I think. But managing the trade isn't particularly easy.

Edited March 3, 2008 by zeon
made a mistake

[mister ed 10]

Sebastian has returned and now he is the resident expert with Tom, and since he is going to be the main presenter as far as teaching VSA is concerned , he should be well placed to respond to the question, wouldn't you say;)

 

Couldn't agree more, let us know if you put it to him.

 

 

 

I certainly don't have a great answer to exits. Point & Figure charts work well, but are difficult to keep up when trading intraday. They are great on the intermediate trades, though.

 

Eiger

 

Eiger - I think there is huge value in hand-drawing point and figure charts, but like you say, doing so intra-day is too difficult (was for me anyway). There is software that will draw them intraday though (tick data so the PF is accurate). If you let me know what box size and reversal you want I could post one from today's ES.

 

I look at the rest of your post Eiger, and like Bearbull says in his response, you did great.

 

 

 

Zeon - the 1-minute chart you posted, is that just your timing chart or also your analysis chart? You had some great entries there and I have to ask how much more were you looking for in those trades? Thanks for posting.

[zeon 10]

Zeon - the 1-minute chart you posted, is that just your timing chart or also your analysis chart? You had some great entries there and I have to ask how much more were you looking for in those trades? Thanks for posting.

 

 

Thanks, great entries may be the case but despite that no winning trades today :doh:. Perhaps exits are more important than entries. Most of my trades actually go in the right direction rather soon after the entry. I use 1 and 5-minute charts, I like to zoom in to pick an entry, I usually take the trade on a market order. I look at volume usually on a higher timeframe though, because it seems to peak all over the place as you can see on the chart. If you zoom out a bit, it's easier to identify "special" volume peaks. I'm still learning to identify the right ones though!

 

What I was looking for in these trades... basically I wanted to ride price down all the way to around 1325. That was a first target because I had support drawn somewhere around there. Perhaps I'm being thick, but I thought prices can plunge sharply in a bear market, but so far it seems like we've seen little of that

[Eiger 10]

Very interesting, partly in how we viewed the same information somewhat differently. I took only four trades -- two shorts and two covers -- in this timeframe (on the NQ, but the pattern was essentially the same). I shorted just before 1000 due to the test of S/R, even though this was just before a news release, and lost a few points. But then I did nothing more until your A, shorted again, and held it until it hit and bounced off a lower support level at your 3/4.

 

The difference? I suppose it's largely due to the reliance -- or lack thereof -- on bars, and to differences in where one locates S/R. (Also in the fact that I like to be done by lunch . . . )

 

I do like the idea of getting out by lunch-time.

 

It is interesting in how we view the charts differently. I saw the action just before 10:00 set up as a spring. Had it happened at any other time during the session, I would have taken it. It is a choice trade. But given that it set up just before news, I passed. I don't really like to trade on news releases, though sometimes like this morning, they can catapult the market.

 

This spring on the ES was actually a pretty nice set up, though psychologically difficult to trade because of the surge of volume after the open. The market had been bid up to put in a higher high and higher low in the overnight. After the open, the market sank. Bar "a" was widespread down with a good amount of volume closing on the lows. VSA teaches that there would be lots of buying on that bar, but it also looked as if it might break the support line. The next bar, "b", showed strong buying coming in. Price dipped just below support and closed above the previous close on nearly the same volume. Now we have a potentially nice spring set up. All we need is confirmation. At bar "c", the market tests the spring on volume less than the previous two bars and holding a higher low with a strong close. That is a near perfect set up.

 

I can see on the NQ where you would short at A. On NQ, price was stopped at resistance. On ES, price made a new high, making it harder to short. The only clue available on the ES in that area was a no demand bar (second bar after the top at A). For me, that wasn't enough of a story to make a trade.

 

Eiger

[Eiger 10]

Eiger, you did great, no need to beat up yourself, you managed to identify the entries and pulled the trigger, that in itself is some achievement. You do not need home runs, increase contract size and aim for fixed points. Also have a look at other markets which are less spikey, NQ, Russell for instance.

 

I agree. I didn't mean to sound like I was complaining. I was just pointing out that even when you take trades off too early, miss opportunities, etc, you can still do pretty well. Home runs shouldn't be chased and trying to being perfect creates problems. But, I always try to find ways to improve -- just my nature, I guess.

 

Eiger

[Eiger 10]

 

Eiger - I think there is huge value in hand-drawing point and figure charts, but like you say, doing so intra-day is too difficult (was for me anyway). There is software that will draw them intraday though (tick data so the PF is accurate). If you let me know what box size and reversal you want I could post one from today's ES.

 

 

I'd love to see a 1/2 by 1/2 point FC of the ES on, say, a 2 or 3-min time frame. Does it draw them via the Wyckoff convention? I only know of one software that uses Wyckoff - that's Bulls Eye Broker. Stockcharts.com also does it via Wyckoff.

 

Eiger

[DbPhoenix 42]

Bar "a" was widespread down with a good amount of volume closing on the lows. VSA teaches that there would be lots of buying on that bar, but it also looked as if it might break the support line.

 

VSA is correct, as far as that goes. There's buying and selling in every bar (which a great many people who use color-coded bars miss). If there's lots of trading activity, as represented by the bar, there will lots of buying, but also a lot of selling. What matters is the effect, i.e., the appearance of the bar. This, to me, is one of the more important points that Wyckoff -- and consequently, VSA -- makes. Someone who focuses on a list of "principles", however, and doesn't go beyond that will look at the close at the lows and think "weakness". Someone else, though, may include the enormous effort that buyers are making, which results in the level of the activity. The results of this effort are shown in the next "bar" (though in a smaller TF, one sees a dip and recovery, like a plane flying into and out of a canyon).

 

The next bar, "b", showed strong buying coming in. Price dipped just below support and closed above the previous close on nearly the same volume. Now we have a potentially nice spring set up. All we need is confirmation. At bar "c", the market tests the spring on volume less than the previous two bars and holding a higher low with a strong close. That is a near perfect set up.

 

Again, the strong buying came in during the previous bar. But its effect was not entirely realized until bar b. As to bar c, you're correct about the confirmation. It's just too bad that the whole thing took place backed up against a market-moving announcement.

 

Incidentally, your remark above -- "it also looked as if it might break the support line" -- is an example of what I call The Dog That Didn't Bark. The fact that it did not break the line is more important than it might otherwise seem, and if one is fuzzy on how to interpret the relationship between price and volume, he can think about what "ought to" have happened, but didn't.

[Eiger 10]

 

Incidentally, your remark above -- "it also looked as if it might break the support line" -- is an example of what I call The Dog That Didn't Bark. The fact that it did not break the line is more important than it might otherwise seem, and if one is fuzzy on how to interpret the relationship between price and volume, he can think about what "ought to" have happened, but didn't.

 

That's a useful way to think about a bar like that -- we certainly see enough of them. I have heard Tom Williams say that these bars represent absorption, but I have always had a difficult time applying that to trading while it was happening. I like your notion that the dog didn't bark and that when it is supposed to do something and doesn't, it is significant. I can get my mind around that. Thanks for the insight.

 

Eiger

[mister ed 10]

I'd love to see a 1/2 by 1/2 point FC of the ES on, say, a 2 or 3-min time frame. Does it draw them via the Wyckoff convention? I only know of one software that uses Wyckoff - that's Bulls Eye Broker. Stockcharts.com also does it via Wyckoff.

 

Eiger

 

Eiger, not quite sure what you mean by 2-3 min timeframe, the chart is drawn from tick data. I have attached a P&F with a 1/2 point box and a 1 box reversal, hope that's what you are after.

 

Such a small scale gives a big chart, I have split it into 2, the first covers the first 2 hours of trading, the second covers up to just prior to 3 pm EST. The times along the horizontal axis are local time here, add 8 to get EST.

 

I have also attached a 1 point by 1 box reversal, which shows the whole session.

[DbPhoenix 42]

Eiger, you did great, no need to beat up yourself, you managed to identify the entries and pulled the trigger, that in itself is some achievement. You do not need home runs, increase contract size and aim for fixed points.

 

This point should not be overlooked, so I'll emphasize it. Traders commonly feel that they ought to be taking every entry and milking every move for all that it's worth, and that they're still not getting it if they leave any money "on the table" (which leads them to leave the trade alone next time which, of course, is the time when the trade makes a U-turn and they end up with nothing).

 

If you want to make serious money at this, nail your entry and nail your exit, then increase your size. You needn't be trading in and out and in and out and in and out all day long. You can do very nicely -- in fact, better than most -- by getting in at the best time, putting on greater size, getting out at the best time, then saying the hell with it and taking the rest of the day off.

 

Don't concern yourself with all those other possible -- and usually hindsight -- trades. Define your setup, wait for it, play it well, and be satisfied.

[DbPhoenix 42]

That's a useful way to think about a bar like that -- we certainly see enough of them. I have heard Tom Williams say that these bars represent absorption, but I have always had a difficult time applying that to trading while it was happening. I like your notion that the dog didn't bark and that when it is supposed to do something and doesn't, it is significant. I can get my mind around that. Thanks for the insight.

 

Eiger

 

Perhaps rather than settle for a representation of absorption, you could actually see it by having a chart with a smaller bar interval alongside or underneath. In this way, you may be able to see the brakes being applied, and you may not even find it necessary to wait for your regular bar interval to "close" before you make your move.

 

All of this at S/R, of course.

[mister ed 10]

Incidentally, your remark above -- "it also looked as if it might break the support line" -- is an example of what I call The Dog That Didn't Bark. The fact that it did not break the line is more important than it might otherwise seem, and if one is fuzzy on how to interpret the relationship between price and volume, he can think about what "ought to" have happened, but didn't.

 

Thanks Db - this thread is moving quick again and hard to keep up with the analysis. I really like your discussion of buying and selling within the same bar, obvious and overlooked at the same time...

 

But I particularly like non-barking dogs, both the metaphor and in real-life (won't get into that). What 'ought-to' happen but doesn't, for me, is a most reliable entry trigger for a low-risk trade. Sometimes it is a challenge to get my head around it in real-time though.

[Nvesta81 10]

I'm fairly new to VSA concepts and there's still something I'm a little confused about that I would like one of you more experienced members to clarify for me.

 

If you have a significant down move that hits support on high volume, then bounces off it heavy volume, then later in the day the same support is tested on low volume, does that indicate possible bounce again because there's lack of supply? I think that's how the VSA documents I read explained it but for some reason my mind tends to look at it in reverse, if there's no volume coming in when it touches support then I would think nobody is interested in buying at that level. It really confuses me.

[Eiger 10]

I have also attached a 1 point by 1 box reversal, which shows the whole session.

 

Thanks, Ed, for those charts. They don't quite look like Wyckoff, though. He has a specific way of making P&F charts.

 

Isn't it getting a tad late for you down under?

 

Eiger

[mister ed 10]

I'm fairly new to VSA concepts and there's still something I'm a little confused about that I would like one of you more experienced members to clarify for me.

 

If you have a significant down move that hits support on high volume, then bounces off it heavy volume, then later in the day the same support is tested on low volume, does that indicate possible bounce again because there's lack of supply? I think that's how the VSA documents I read explained it but for some reason my mind tends to look at it in reverse, if there's no volume coming in when it touches support then I would think nobody is interested in buying at that level. It really confuses me.

 

Nvesta - your question is probably a little general for me to give a definitive answer to. I think in general, in the sort of situation you describe, a move lower on lowish volumes into previous support would be indicative of sellers not being willing to sell heavily, but I would have to look at the reaction to the price dip - does the price move up reasonably quickly, if so then the buying that is being done is into a lack of immediate supply... if you have an example chart you can post there might be a better chance to think it through?

 

 

Eiger - nearly lunchtime here ... late for some....early for others (oh to be young again LOL).

[Eiger 10]

Perhaps rather than settle for a representation of absorption, you could actually see it by having a chart with a smaller bar interval alongside or underneath.

 

I know what you are saying, Db. My main chart is the 5-minute. My smallest time frame is the 3-min. I also keep a 10-min and a 60-min chart on the screen.

 

I used to use a 1-min chart, but found that just too deceptive and misleading. Too many times I would be convinced I would see something, only to have it evaporate (with me in a trade, of course). A good trader once told me that if you are having trouble, go up a time frame. For me, that was very good advise.

 

Eiger

[Nvesta81 10]

Nvesta - your question is probably a little general for me to give a definitive answer to. I think in general, in the sort of situation you describe, a move lower on lowish volumes into previous support would be indicative of sellers not being willing to sell heavily, but I would have to look at the reaction to the price dip - does the price move up reasonably quickly, if so then the buying that is being done is into a lack of immediate supply... if you have an example chart you can post there might be a better chance to think it through?

 

 

Ok, here is an example chart I made using a resistance level.

 

As you will see, the first test was on high volume, prices bounced off resistance telling me that supply showed itself at these levels bringing prices down. The final bar test is on low volume. I'm wondering how one should perceive this? When near R Is it a lack of supply, or a lack of demand, or vice versa on S? Which way is price more likely to go from an expert's point of view?

 

[DbPhoenix 42]

Ok, here is an example chart I made using a resistance level.

 

As you will see, the first test was on high volume, prices bounced off resistance telling me that supply showed itself at these levels bringing prices down. The final bar test is on low volume. I'm wondering how one should perceive this? When near R Is it a lack of supply, or a lack of demand, or vice versa on S? Which way is price more likely to go from an expert's point of view?

 

You're trying to isolate the variables and keep them separate in order to study them, but they all work together simultaneously. If you were to see the bars move, this would be clearer, and the simultaneity more obvious.

 

A "volume bar" represents trading activity, both buying and selling. Trying to separate the two is pointless. If trading activity is "low" relative to the trading activity (or TrAc, if that's okay; I can't call it "TA") during other segments of the price/volume continuum (and it is a continuum), then there may be little interest on both sides, or there may be a great deal of interest on one side but not the other. You'll know which by how price behaves. If you've chosen to represent price by a bar, and there's a great deal of buying interest but not much selling interest, price will riese because there's "too much money pursuing too few goods". In other words, everybody's desperate for bananas, but there are only a few bananas available. So the price will skyrocket, but the number of transactions will be few.

 

Therefore, if your price bar is extending itself as it reaches R and the volume bar is unremarkable, then you've got a lot of buying pressure (demand) which is driving price higher, but very little resistance (supply or selling pressure) to that demand, keeping "volume" or TrAc, low.

 

With me?

[Nvesta81 10]

You're trying to isolate the variables and keep them separate in order to study them, but they all work together simultaneously. If you were to see the bars move, this would be clearer, and the simultaneity more obvious.

 

A "volume bar" represents trading activity, both buying and selling. Trying to separate the two is pointless. If trading activity is "low" relative to the trading activity (or TrAc, if that's okay; I can't call it "TA") during other segments of the price/volume continuum (and it is a continuum), then there may be little interest on both sides, or there may be a great deal of interest on one side but not the other. You'll know which by how price behaves. If you've chosen to represent price by a bar, and there's a great deal of buying interest but not much selling interest, price will riese because there's "too much money pursuing too few goods". In other words, everybody's desperate for bananas, but there are only a few bananas available. So the price will skyrocket, but the number of transactions will be few.

 

Therefore, if your price bar is extending itself as it reaches R and the volume bar is unremarkable, then you've got a lot of buying pressure (demand) which is driving price higher, but very little resistance (supply or selling pressure) to that demand, keeping "volume" or TrAc, low.

 

With me?

 

Makes perfect sense to me now. I was just a bit confused from reading Master the markets on a few things but after reading your post I now see things a bit clearer. Thanks.

[DbPhoenix 42]

Makes perfect sense to me now. I was just a bit confused from reading Master the markets on a few things but after reading your post I now see things a bit clearer. Thanks.

 

That's okay. It'll all cloud over again soon. That's the way of it.

 

The learning curve can be accelerated under certain conditions, but looking at price action this way requires a certain conceptual and perceptual bias, and some people (many? most?) are never able to develop it.

 

Fortunately, there are many ways to make money, though to me none of them make as much sense.