[VSA] Volume Spread Analysis Part II

[DbPhoenix 42]

All I can say is this:

1. I study the book.

2. I consume any information on VSA I can.

3. I have yet to find anything I have been told in 1 or 2 above to be false.

4. My results speak for themselves because I follow what I have learned.

5. I am happy at the results I have gained from being a student of VSA

 

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

 

I'm glad that you're happy with your results. However, I continue to be interested in the logic of your position, i.e., the position of an ordinary, part-time, retail trader as opposed to the author of the book.

 

For example, if professional money is the herd, and the objective of VSA is to follow the activities of the professional money, does it not follow that by following the activities of the professional money one is following the activities of the herd?

 

On the other hand, if "professional money" is defined as specialists, is one to assume that the majority of specialists are all doing the same thing in the same way at the same time?

 

Or is it possible that there's some other more reasonable explanation of which specialists and market-makers play only a small role, or at least no larger than anyone else?

[Sledge 13]

I'm glad that you're happy with your results. However, I continue to be interested in the logic of your position, i.e., the position of an ordinary, part-time, retail trader as opposed to the author of the book.

 

For example, if professional money is the herd, and the objective of VSA is to follow the activities of the professional money, does it not follow that by following the activities of the professional money one is following the activities of the herd?

 

On the other hand, if "professional money" is defined as specialists, is one to assume that the majority of specialists are all doing the same thing in the same way at the same time?

 

Or is it possible that there's some other more reasonable explanation of which specialists and market-makers play only a small role, or at least no larger than anyone else?

 

You know, I don't have an answer for you. Maybe you can call Tom Williams personally and ask him what the answer is. Talk to Seb, maybe for a consulting fee- Tom can give you the enlightenment you seek.

[Nvesta81 10]

I think the reasoning behind MTM if I recall correctly is that syndicate groups and "big" players are the professional money, and the market-makers and specialists are able to see where these players are buying/selling from their books. Therefor, they are able to manipulate prices to facilitate their inventory requirements, and in the process turn a profit for themselves in their private accounts. It's been awhile since I read the book so I might be totally off here... it's an interesting concept anyway, but I still remain somewhat skeptical.

[DbPhoenix 42]

I think the reasoning behind MTM if I recall correctly is that syndicate groups and "big" players are the professional money, and the market-makers and specialists are able to see where these players are buying/selling from their books. Therefor, they are able to manipulate prices to facilitate their inventory requirements, and in the process turn a profit for themselves in their private accounts. It's been awhile since I read the book so I might be totally off here... it's an interesting concept anyway, but I still remain somewhat skeptical.

 

But is this not inconsistent with Sledge's interpretation that syndicate groups and "big" players are the herd?

[DbPhoenix 42]

You know, I don't have an answer for you. Maybe you can call Tom Williams personally and ask him what the answer is. Talk to Seb, maybe for a consulting fee- Tom can give you the enlightenment you seek.

 

Again, I'm not so much interested in what Williams thinks as in what you think. There is a paradox here, and I'm interested in how you resolved it. Sorry if you interpret this as an attack.

 

If you'd rather not answer, I won't ask again. Perhaps someone else, though, will offer an explanation.

Edited April 8, 2008 by DbPhoenix

[Nvesta81 10]

Quoted straight from the book:

 

"It is important to understand that the market-makers do not control the market. They are responding to

market conditions and taking advantage of opportunities presented to them. Where there is a window of

opportunity provided by market conditions – panic selling or thin trading – they may see the potential to

increase profits through price manipulation, but they can only do so if the market allows them to. You

must not therefore assume that market-makers control the markets. No individual trader or organisation

can control any but the most thinly traded of markets for any substantial period of time.

Market-makers are fully aware of the activities of trading syndicates and other professional operators that

place substantial orders. It therefore makes sense that they will take whatever opportunity is available to

better their own accounts accordingly."

 

A little information about what the book refers to as the 'herd' :

 

We have all heard of the term ‘resistance’, but what exactly is meant by this loosely used term? Well, in

the context of market mechanics, resistance to any up-move is caused by somebody selling the stock as

soon as a rally starts. In this case, the floating supply has not yet been removed. The act of selling into a

rally is bad news for higher prices. This is why the supply (resistance) has to be removed before a stock

can rally (rise in price).

Once an up-move does take place, then like sheep, all other traders will be inclined to follow. This concept

is normally referred to as ‘herd instinct’ (or crowd behaviour). As human beings, we are free to act

however we see fit, but when presented with danger or opportunity, most people act with surprising

predictability. It is this knowledge of crowd behaviour that helps the professional syndicate traders to

choose their moment to make a large profit. Make no mistake – professional traders are predatory beasts

and uninformed traders represent the symbolic ‘lamb to the slaughter’.

We shall return to the concept of ‘herd instinct’ again, but for now, consider the importance of this

phenomenon, and what it means to you as a trader. Unless the laws of human behaviour change, this

process will always be present in the financial markets. You must always try to be aware of ‘Herd

Instinct’.

There are only two main principles at work in the stock market, which will cause a market to turn. Both of

these principles will arrive in varying intensities producing larger or smaller moves:

1. The ‘herd’ will panic after observing substantial falls in a market (usually on bad news) and will

usually follow its instinct to sell. As a trader who is aware of crowd psychology, you must ask

yourself, “Are the trading syndicates and market-makers prepared to absorb the panic selling at these

price levels?” If they are, then this is a good sign that indicates market strength.

2. After substantial rises, the ‘herd’ will become annoyed at missing the up-move, and will rush in and

buy, usually on good news. This includes traders who already have long positions, and want more. At

this stage, you need to ask yourself, “Are the trading syndicates selling into the buying?” If so, then

this is a severe sign of weakness.

Does this mean that the dice is always loaded against you when you enter the market? Are you destined

always to be manipulated? Well, yes and no.

A professional trader isolates himself from the ‘herd’ and becomes a predator rather than a victim. He

understands and recognises the principles that drive the markets and refuses to be misled by good or bad

news, tips, advice, brokers, or well-meaning friends. When the market is being shaken-out on bad news, he

is in there buying. When the ‘herd’ is buying and the news is good, he is looking to sell.."

[DbPhoenix 42]

Thank you, Nvesta.

 

One of the reasons why it's so difficult to come up with a coherent and internally consistent strategy that implements what is addressed in VSA is that there are so many iterations of VSA, from the original all the way to TG. For example, the emphasis on the location of the "close" of a bar even when there is no universally agreed-upon bar interval presents certain difficulties that should be obvious.

 

This is why I'm less interested in what the book "says" and much more interested in what is being "heard" by those who are reading/studying it. If, for example, ten people are studying it and they each have a different understanding of how it all works than everyone else among the ten, then I should think that they, at least, would be interested in ironing out these differences. Perhaps then their understanding of what is happening in real time (since this is when trades are placed) would be enhanced.

[Ricks Inn 10]

Tom Williams is, of course, not the only one who's written about market manipulation as fact. Though no longer in print, all three of Richard Ney's books books document this (the first two in great detail).

 

Tom has also pointed out that "smart money" is not monolithic, does compete among themselves, and does not consist of everyone who works in the financial sector as a career. Bank investors, retirement fund managers, retail brokers, individual financial planners at places such as HSBC and UBS --- all control very large funds, but almost invariably part of the "herd" (I've been a customer of these in years past, and my HSBC account manager disputed manipulation being a significant factor.)

 

So there is a distinction here. Not till you get to the so-called syndicate, specialist, or market-maker level do you find the folks who have 1) the funding, and 2) the inside knowledge (e.g. where stops are placed, pending large block orders being distributed) which are needed to implement the maneuvers Tom and Richard -- and others -- speak about. I don't THINK this is a paradox; maybe unseemly, borderline illegal, winked at by the revolving door regulators --- but extant none the less.

 

Check this for a rare main-stream-media reference to this activity:

 

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3587090.ece (The first sentence in particular -- this usually doesn't get out, and Tom Williams has spoken of having witnessed this very behaviour within the syndicate he worked for in the 1960s.)

[zeon 10]

This is why I'm less interested in what the book "says" and much more interested in what is being "heard" by those who are reading/studying it. If, for example, ten people are studying it and they each have a different understanding of how it all works than everyone else among the ten, then I should think that they, at least, would be interested in ironing out these differences. Perhaps then their understanding of what is happening in real time (since this is when trades are placed) would be enhanced.

 

 

This is one of the major problems I have with VSA. Last week or so I posted a chart where I saw a long opportunity. However the market reversed before I took profits. When I posted the chart here, I got the response that 'after seeing two down bars' you should've exited. But on what timeframe? Two down bars on 5-minute might not even show up on a 15-min chart, etc, etc.

 

I don't mean any offense to anybody here... I hope I can still receive constructive criticism because I am still trying to find out how best to approach the markets. Everybody's input is appreciated.

[BlowFish 10]

Lets not forget Reminiscences of a Stock Operator by Edwin Lefevre. Through the anecdotes of the campaigns waged by the great traders of yesteryear much can be learnt about the techniques employed by those legends in meeting there objectives. Not only that its a cracking good read.

[zeon 10]

Check this for a rare main-stream-media reference to this activity:

 

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3587090.ece (The first sentence in particular -- this usually doesn't get out, and Tom Williams has spoken of having witnessed this very behaviour within the syndicate he worked for in the 1960s.)

 

I think that's a different kind of manipulation than the one we were talking about. For example, remember all the spam mails where you are advised to buy this or that stock (usually crap penny stocks)? Apparently it does have an effect on the stocks price, to a certain extent that those who are spreading the rumour can take profit from it. I suppose that's manipulation too.

[DbPhoenix 42]

Thank you, RI.

 

If I understand you, then, specialists et al implement the maneuvers that are described by Williams and Ney. But Williams as quoted by Nvesta appears to be saying that they do not exert that level of control. While one may not call this a paradox, it does seem to qualify as an inconsistency.

[Sledge 13]

This is one of the major problems I have with VSA. Last week or so I posted a chart where I saw a long opportunity. However the market reversed before I took profits. When I posted the chart here, I got the response that 'after seeing two down bars' you should've exited. But on what timeframe? Two down bars on 5-minute might not even show up on a 15-min chart, etc, etc.

 

I don't mean any offense to anybody here... I hope I can still receive constructive criticism because I am still trying to find out how best to approach the markets. Everybody's input is appreciated.

 

Zeon-

Although it may have come across harsh to you, I really was trying to help you. You stated that you thought that taking your profits and banking them was "greedy." Taking the win when you see that turn of events is smart- but that is how I trade. I personally, take what the market gives me. I don't set targets without flexibility. Say I would like 100 pips on a particular trade. That is a target. If it gets to 98 pips and stalls or starts to reverse- you bet your ass I take my 98 pips-bank that money and am happy. Do I feel like some failure that I couldn't get the 100 pips I wanted? Hell no, I'll console myself with the 98 pips of cash I DID make!

 

No one here or any other message board can tell you how to trade for yourself. No one can mimic anyone elses style or comfort level. I have had some very nice conversations with JJTrader and Eiger. All 3 of us are successful traders in our own right, we all follow parts of VSA, some of us are weighed more heavily in VSA than the others. AND THAT IS OK. No one says you have to take Master the Markets as a Bible, no one says- if you deviate from one word from it- you can't call yourself a VSA purist. No one says you can't question something in VSA- but question it, test it and prove it.

 

The 7 steps I posted on the board I have seen take shape hundreds of times- HUNDREDS. After that happens over and over- it validates what Tom says- I didn't take his word as bond when I started- I took his concept- watched it in a live environment and said- WOW this guy is for real.

Sledge

[BlowFish 10]

This is one of the major problems I have with VSA. Last week or so I posted a chart where I saw a long opportunity. However the market reversed before I took profits. When I posted the chart here, I got the response that 'after seeing two down bars' you should've exited. But on what timeframe? Two down bars on 5-minute might not even show up on a 15-min chart, etc, etc.

 

I don't mean any offense to anybody here... I hope I can still receive constructive criticism because I am still trying to find out how best to approach the markets. Everybody's input is appreciated.

 

This answer from a VSA point of view (and from the point of view or most methodologies that employ charts of bars/candles

) would be 'the chart you are trading'. Or in the case you mention above the chart you posted. having said that know one can tell you how to exit all they can do is say what they may have done.

 

More sophistication can be added by looking at longer periods (bars) for 'context' and shorter periods (even approaching real time) to 'trigger' a trade. For some this can add confusion rather than clarity.

 

You need to think about what you want to achieve and pick suitable resolution tools. For example a trader trying to capture monthly swings is unlikely to be bothered by price moving against him for 10 minutes or for a few points. Likewise a scalper is unlikely to be prepared to have price move against him for more than a few seconds or few ticks.

[DbPhoenix 42]

This answer from a VSA point of view (and from the point of view or most methodologies that employ charts of bars/candles

) would be 'the chart you are trading'. Or in the case you mention above the chart you posted. having said that know one can tell you how to exit all they can do is say what they may have done.

 

Not exactly. A methodology which places so much importance on bars and the position of the close and the context -- i.e., the surrounding bars, multiple bar intervals, etc -- ought to be able to tell the individual exactly where to exit, or at least tell him in detail what two or three options that are consistent with the methodology are available to him. If it can't, then the methodology is not sound.

[Eiger 10]

Tom Williams is, of course, not the only one who's written about market manipulation as fact. Though no longer in print, all three of Richard Ney's books books document this (the first two in great detail).

 

Tom has also pointed out that "smart money" is not monolithic, does compete among themselves, and does not consist of everyone who works in the financial sector as a career. Bank investors, retirement fund managers, retail brokers, individual financial planners at places such as HSBC and UBS --- all control very large funds, but almost invariably part of the "herd" (I've been a customer of these in years past, and my HSBC account manager disputed manipulation being a significant factor.)

 

So there is a distinction here. Not till you get to the so-called syndicate, specialist, or market-maker level do you find the folks who have 1) the funding, and 2) the inside knowledge (e.g. where stops are placed, pending large block orders being distributed) which are needed to implement the maneuvers Tom and Richard -- and others -- speak about. I don't THINK this is a paradox; maybe unseemly, borderline illegal, winked at by the revolving door regulators --- but extant none the less.

 

Check this for a rare main-stream-media reference to this activity:

 

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3587090.ece (The first sentence in particular -- this usually doesn't get out, and Tom Williams has spoken of having witnessed this very behaviour within the syndicate he worked for in the 1960s.)

 

I think Ney's books are OOP, and may be somewhat hard to find. Check on e-Bay, though. I just bought Wall Street Jungle for $0.75. Probably my best trade this week

 

Isn't it in one of Ney's books that the mobster Lucciano said he got into the wrong mob after seeing market makers at work?

 

Nice post, Rick

 

Eiger

[Eiger 10]

Lets not forget Reminiscences of a Stock Operator by Edwin Lefevre ....

 

Not only that its a cracking good read.

 

One of my favorite books, and a great study in pool/syndicate manipulation.

 

A "cracking" good read? I had to chuckle at that. What a great descriptor, and one I hadn't heard before. Is it British?

 

Eiger

[Ricks Inn 10]

 

If I understand you, then, specialists et al implement the maneuvers that are described by Williams and Ney. But Williams as quoted by Nvesta appears to be saying that they do not exert that level of control. While one may not call this a paradox, it does seem to qualify as an inconsistency.

 

Thanks for that, Db. Maybe the best way to think about this issue is as a continuum -- from interest-to-influence-to-manipulation-to-control. The "smart money" isn't so smart that it always wins! They battle each other (though we retail traders are much softer touches) and win some / lose some. It's not a light switch labelled "Market Control ON/OFF", and while all syndicates attempt manipulation, none (individually or collectively) have the power to fully control. IMO, at least...

[Ricks Inn 10]

I think Ney's books are OOP, and may be somewhat hard to find. Check on e-Bay, though. I just bought Wall Street Jungle for $0.75. Probably my best trade this week

 

Isn't it in one of Ney's books that the mobster Lucciano said he got into the wrong mob after seeing market makers at work?

 

 

Eiger

 

Yeah, my three Ney books reside in the high-mildew section of my library (bought through the used book Amazon partners). <SmileySneezing emoticon>

 

The Luciano story is a hoot (even if apocryphal, but I THINK true). Ney also is supposedly one of two celebrities (along with Corvair-era Ralph Nader) who was dis-invited as a guest from Johnny Carson's "Tonight" show, since they were supposedly just too dang incendiary. Thx, Eiger.

[DbPhoenix 42]

Thanks for that, Db. Maybe the best way to think about this issue is as a continuum -- from interest-to-influence-to-manipulation-to-control. The "smart money" isn't so smart that it always wins! They battle each other (though we retail traders are much softer touches) and win some / lose some. It's not a light switch labelled "Market Control ON/OFF", and while all syndicates attempt manipulation, none (individually or collectively) have the power to fully control. IMO, at least...

 

All of which is closer to my own viewpoint. As I posted somewhere years ago, brokerages aren't going to upgrade something they haven't already bought, not are they going to downgrade something they haven't already sold. Anybody with any appreciable amount of money at their disposal is going to try to influence the market in some way, and market-makers and specialists are only a segment of this crowd. To suggest that professional money is the herd and that market-makers and specialists are the herders misses what to me is the point.

 

If one subscribes to the puppet-master view, he will find himself in a continuous state of looking for the trap, suspecting every directional move, trading against the herd (the trend) when he ought to be trading with it, always searching for those shadowy figures lurking in the corners, ready to leap out and catch his stop.

 

On the other hand, if one gets past all that and focuses on the central concept of continuation and exhaustion and the means by which one can detect this via the relationship between price and volume, independent of whatever bar interval one chooses to display the information, then he comes a hell of a lot closer to being able to develop a consistently profitable trading strategy out of VSA or anything else that focuses on price action.

 

What was secret twenty or thirty years ago is no longer a secret. Everybody but the greenest newbie knows what a specialist is, or a market-maker. But even if no one did, it wouldn't matter. If one knows how to spot exhaustion, for example, the cause for the exhaustion is irrelevant.

 

This may be of interest, from Wyckoff, who popularized the ideas upon which VSA -- at least in part -- is based:

 

There is no Composite Operator, but the effect of the combined operations of bankers, pools, large operators, floor traders and the public is, when boiled down on the tape, of the same effect as if it were produced by one man’s operations. It is important that you observe the market from this standpoint, and that your trading operations are based, not on what you formerly regarded as the market’s characteristics but on the fundamental law of supply and demand, which is at the bottom of every move that is made in every stock in the market at all time. This law is working and will continue to work always and forever. There can be no getting away from it. It does not matter whether the buying and the selling, or both, are genuine or artificial, that is, manipulative, designed for a purpose.

 

No matter who makes these tests – the Composite Man, a pool manager, large operator, or a big floor trader – the result of the tests show immediately on the tape. You , sitting at the ticker, can observe at once whether these tests bring a bullish or bearish response, and you are just as free to set upon them as if you had made them yourself. Therefore, never fail to observe these and other details in tape reading. You can never tell what they may lead to or signify. I have derived some large profits from tape indications which most people overlooked. You can do the same when you learn to be highly observant.

 

 

[Nvesta81 10]

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.

Edited April 8, 2008 by Nvesta81

[Eiger 10]

It's been a light volume, thin trading day thus far. My guess is that everyone is waiting for the FOMC minutes to be released at 2:00. Sometimes this can move the market. I just stand aside in conditions like this and wait for more activity to come back into the market.

 

Eiger

[BlowFish 10]

Not exactly. A methodology which places so much importance on bars and the position of the close and the context -- i.e., the surrounding bars, multiple bar intervals, etc -- ought to be able to tell the individual exactly where to exit, or at least tell him in detail what two or three options that are consistent with the methodology are available to him. If it can't, then the methodology is not sound.

 

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.

[BlowFish 10]

One of my favorite books, and a great study in pool/syndicate manipulation.

 

A "cracking" good read? I had to chuckle at that. What a great descriptor, and one I hadn't heard before. Is it British?

 

Eiger

 

Yup, I should change my location seeing as I am not travelling much at the moment.

[tawe trader 10]

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.

 

Nvesta,

 

Even an expert chart (VSA) reader is not going to be correct 100% of the time. All we can do is 'try' and read a chart to the best of our ability and put the law of probability to work. If we can't see a clear indication, them maybe it's wise to do not anything until a low-risk or clear situation/setup appears.

 

http://www.probabilitytheory.info/index.htm

 

A "cracking" good read? I had to chuckle at that. What a great descriptor, and one I hadn't heard before. Is it British?

 

Eiger

 

Eiger it is indeed something that a Brit would say....... like that was a cracking game of football

 

Regards

Tawe

Edited April 8, 2008 by tawe trader
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