[VSA] Volume Spread Analysis Part II

[Tasuki 10]

I prefer the use of WRBs. On the chart you see numbers. Here is how it works. Once there is a WRB, you place a stop at the top of the body (plus 1 or 2 tics/pips/handles) but ONLY AFTER there is another WRB. So, the WRB with the 1 is where the stop is placed but only after the appearance of the WRB with the 1/2. When there is another WRB, we can move the stop down to the second WRB.

 

CW, This is going to sound dumb. How do you define a WRB? How wide does wide have to be to be a WRB compared to the bars around it? Double the average size? one and a half times? Three times? If you're basing your stop price on the appearance of a second WRB, it would be helpful (essential, I guess) to know when a second WRB has occurred.

 

Thanks SO much for sharing your knowledge!!!!!

[Tasuki 10]

I prefer the use of WRBs. On the chart you see numbers. Here is how it works. Once there is a WRB, you place a stop at the top of the body (plus 1 or 2 tics/pips/handles) but ONLY AFTER there is another WRB. So, the WRB with the 1 is where the stop is placed but only after the appearance of the WRB with the 1/2. When there is another WRB, we can move the stop down to the second WRB.

 

.

 

CW, This is going to sound dumb. How do you define a WRB? How wide does wide have to be to be a WRB compared to the bars around it? Double the average size? one and a half times? Three times? If you're basing your stop price on the appearance of a second WRB, it would be helpful (essential, I guess) to know when a second WRB has occurred.

 

Thanks SO much for sharing your knowledge!!!!!

[winnie 10]

Dear Eiger,

Beside this web and Tom 's book, is there any other source which I could learn more about volume spread analysis ?

 

Thanks

Winnie

[charcoalstick 10]

What are typical VSA features u see in accumulation?

 

If the next bar after a WRB is a narrow range within the WRB (harami), how will u know whether this is a going to be a change in trend or a resting before continuation of trend?

[Eiger 10]

Dear Eiger,

Beside this web and Tom 's book, is there any other source which I could learn more about volume spread analysis ?

 

Thanks

Winnie

 

I think there are several good additional sources:

 

The VSA Symposium DVDs are quite worthwhile for learning basic through advanced VSA. Sebastian Manby reviews in great detail every major VSA indication and describes how to trade them. He also shows how to take any chart and methodically analyze it. Tom Williams describes several 'bread & butter'-type VSA setups we see occur all the time. I think a trader can develop a very good trading plan from this material.

 

In 2007 on different forums, Sebastian Manby posted several analyses of the intraday and daily S&Ps. These are really excellent and quite detailed - well worth seeking out. Google his name and also 'vsatrader' and you will readily find these.

 

VSA, of course, is based on the work of Richard Wyckoff. Tom Williams's original software was called Wyckoff/VSA and was designed to computerize Wyckoff principles. Wyckoff wrote about how to read the stock market via its own actions through the fundamental laws of supply-demand, effort-result, and cause-effect. Reading some of Wyckoff's material can only help you as a trader.

Studies in Tape Reading

by Rollo Tape (a pen name of Wyckoff) is one book I refer to often. Even though it was written in 1910, it has a wealth of information.

Wyckoff's course is still available from the Wyckoff/Stock Market Institute (formerly Wyckoff Associates). Units 2 & 3 are the heart of the course. Unit 2 includes Wyckoff's original course written in the early 1930s. Unit 3 has most of the work of Bob Evans, the head of Wyckoff Associates during the 1940s-1960s, which expanded on Wyckoff's original work in many useful ways.

In Unit 2, Wyckoff wrote a bar-by-bar analysis of the late 1930/1931 stock market (NY Times 50 Index). Wyckoff considered this to be the most important part of the course and is important to study.

 

These sources, along with Tom Williams's Undeclared Secrets that Drive the Stock Market would be a pretty complete resource set for learning and trading this method. Tradeguider also, of course, has additional materials and the software you can look into.

 

Eiger

[CandleWhisperer 10]

CW, This is going to sound dumb. How do you define a WRB? How wide does wide have to be to be a WRB compared to the bars around it? Double the average size? one and a half times? Three times? If you're basing your stop price on the appearance of a second WRB, it would be helpful (essential, I guess) to know when a second WRB has occurred.

 

Thanks SO much for sharing your knowledge!!!!!

 

While one can choose any "length" for the WRB, I am using Mark's standard of a WRB having a larger body than the three(3) prior intervals. So you need four (4) intervals where the fourth has a body (open-close) greater than the previous three consecutive intervals.

 

Again, there is no law that says it has to be 3. One can use any number. However, it is not recommended to use less than 3 periods.

[CandleWhisperer 10]

 

In 2007 on different forums, Sebastian Manby posted several analyses of the intraday and daily S&Ps. These are really excellent and quite detailed - well worth seeking out. Google his name and also 'vsatrader' and you will readily find these.

 

 

Eiger

 

 

His thread on Elitetrader.com under the name VSATrader is a MUST read. And best of all, it is free. He also has videos here on TL. There is no need to spend the that much money, at least not at the beginning of your educational process.

 

* You can download the Master the Markets book for free.

 

* You can watch all Tradeguider archives for free.

 

* You can watch CBOT (CME Group) webinars for free.

 

* You can read all the posts here for free.

 

* Then I would spend the money on the bootcamp first. After that the London symposium.

[CandleWhisperer 10]

I may have more to say about this chart later, but just wanted to put it here to show one of our core principles:

 

Strength (demand) enters on down bars.

 

Note the Ultra High Volume down bar that closes off its lows with the next bar down. The market makes a quick (counter thrust up) after that bar. If all that volume had been selling then the next bar should not be down. Nor should there of been the subsequent rise in prices.

 

Also note that the bar's range is narrow for the amount of volume. There is "churn" in this bar. Demand is swamping supply.

 

My entry signal would actually be the test bar within the body of the WRB. Two bars later there is a dark WRB but it does not close lower than the test bar. Therefore, a contingency plan would not be in effect (reversal of long into a short position). However, my stop would of been triggered on that Churn bar. :doh:

[HAKUNA 10]

Have the bootcamp CD and the London Symposium DVD if anybody is interested in buying

[kuky969 10]

Please what do you think ???

Tom write in Market the Master that likely top is :

high volume , narrow spread , up day into new high ground

 

it is same in the bottom ??? ( I think no but I dont know logically explain it )

 

Thank

[CandleWhisperer 10]

Please what do you think ???

Tom write in Market the Master that likely top is :

high volume , narrow spread , up day into new high ground

 

it is same in the bottom ??? ( I think no but I dont know logically explain it )

 

Thank

 

At the top of a rising market, it is called "end of a rising market".

 

At the bottom, I do not believe it is called "end of a falling market". However, it is indeed a sign of such.

 

Tom mentions it in his check list for going long pg. 112.

 

If you think about it, is should be the same both ways. The high volume is needed by the BBs to get into or out of the market. High volume allows them to do so without marking the price up or down against themselves. Within that high volume we likely have the herd acting en mass. And when the herd is acting en mass, it is usually a good point to do the opposite.

 

The fact that the spread is narrow shows that the players that can see both sides of the market are more bullish (in the case of a down move). Why? Well if they were bearish, they would be willing to let the range expand. But since they can see the Smart money orders on the buyside, they keep the spread narrow and let the herd think they are getting a good price.

[Tasuki 10]

VSA question. Price in lazy downtrend, falling more than rising. Then price flatlines for many bars and volume goes down significantly. In VSA terms, would this mean "no demand" or "no supply"? Is there anything in this chart (attached) that suggests whether price will continue to go down or will rebound?

[Eiger 10]

VSA question. Price in lazy downtrend, falling more than rising. Then price flatlines for many bars and volume goes down significantly. In VSA terms, would this mean "no demand" or "no supply"? Is there anything in this chart (attached) that suggests whether price will continue to go down or will rebound?

 

In general, there is buying come in at A, an inability to follow through to the downside at B, a rally, and then a Spring at C and a Test of the Spring at D. So, just from this chart alone, there is some strength in the background followed by a Spring and a Test. Also, volume has obviously receded from A to C. So, from this chart alone, you would expect the market to rally above the last rally highs.

 

Note that I am emphasizing from this chart alone. Springs are wonderful set ups in a rising market or after a market has climaxed. They are a pretty poor bet, however, in a falling market. (The same is true for upthrusts in a rising market). We always need to understand the background. As I mentioned recently in another VSA thread, you will get your head handed to you trying to trade VSA indications by looking at only a few bars.

 

I don't mean to sound harsh, but your question: "How do you know [from these few bars] whether this is 'no demand' or 'no supply'" is not a particularly useful question to be asking. The more constructive question is this: "Is this market showing sufficient strength to change the trend?" Unfortunately, we can't answer that question from this chart alone. We need to see what was going on prior to A.

 

Here are some things to think about in helping you evaluate whether or not strength has appeared after what you say has been a downtrend of some degree:

 

• Has there been climactic action at A? Are we seeing wide spreads, an acceleration in the downtrend, and the heaviest volume since the downtrend began?
  
• Is this market at an oversold level (trend lines or reverse trend lines)?
  
• Is price hitting an important support level?
  
• How does the subsequent rally compare to earlier rallies? Is this rally larger, longer, and with greater volume than on the previous rallies in the downtrend?
  

 

Affirmative answers to these questions indicates strength. If strength truely has appeared, then a Spring and a subsequent Test as seen here at C and D are an indication of an immediate rally. If there is strength, then this market should rally and rally vigorously.

 

On this chart, we are not seeing an immediate rally. Price, instead, is hugging the lows. The "danger point" is the low of the Spring. An inability to rally away from the danger point is not a good sign. It suggests to me that there probabably isn't strength in the background.

 

If I were unsure about the strength as here, I would wait to see what the market does next. If it does rally well, I would be looking to take a long position on the next reaction. There has been enough "cause" (sideways movement) giving professional traders enough opportunity to accumulate that the market, if it does rally, will likely rally for 2-3 legs. There will be opportunity to enter when things become more clear.

 

On the other hand, if price falls lower, I have avoided getting myself into a poor position due to uncertainty, and I can look for a short on the next rally.

 

So, again, I don't mean to sound harsh, but the right question from a pragmatic trading point of view is always about the background first, then the entry setups.

 

Hope this is helpful,

 

Eiger

Edited October 11, 2008 by Eiger

[CandleWhisperer 10]

VSA question. ...... In VSA terms, would this mean "no demand" or "no supply"? Is there anything in this chart (attached) that suggests whether price will continue to go down or will rebound?

 

 

First, Take a look at Eiger's excellent post. Very nice job.

 

A few definitions:

 

No Selling Pressure:

 

A narrow range or wide range bar with volume less than the previous two bars that closes down from the previous bar. Generally, strength enters ( or shows itself) on down bars.

 

No Buying Pressure:

 

A narrow range or wide range bar with volume less than the previous two bars that closes up from the previous bar. Generally, weakness enters (or shows itself) on up bars.

 

No Supply:

 

A narrow range bar with volume less than the previous two bars that closes down from the previous bar. With the next bar up.

 

Therefore, ALL No Supply bars are No Selling Pressure bars, but not all No Selling pressure bars are No Supply bars.

 

No Demand:

 

A narrow range bar with volume less than the previous two bars that closes down from the previous bar. With the next bar down.

 

Therefore, ALL No Demand bars are No Buying Pressure bars, but not all No Buying Pressure bars are No Demand.

 

 

During an Accumulation phase one can see both No Buying Pressure bars and No Selling Pressure bars. This is what we see at the right side of your chart. What Eiger calls a spring, VSA would call a high volume test. Markets can move up on a high volume test, but not very high (there is too much supply holding it down). What usually happens after such a test, is a move back down and a test into the area of the previous test (high volume area). Hence, we get the second test, which Eiger has correctly labeled on his chart as point D.

 

The volume on that second test is still high, although lower than the first test. This is not a good sign. We would really like to see a test with volume less than the previous two bars. At that point the market would be poised to move up.

 

If we were to see a dark WRB closing lower than that last test bar, then that would be a sure sign of weakness and the market would likely fall from there.

[CandleWhisperer 10]

Here is a good example of how I understand things. I could be totally wrong and would like to here from the experts if I am.

 

The candle in question is the last one (hard right edge).

 

It is a narrow (narrower than the previous candle) candle on volume less than the previous two candles, closing up and closing below the midpoint of the candle. At this point, one might call it No Demand. However, there are two things to consider:

 

1. The next bar could be up, which would only make this bar No Buying pressure.

 

2. This is the last half hour of Friday in a time where nobody wants to be long anything over the weekend. In other words, there is a natural drop off in volume at this time, so we are almost certainly dealing with no selling pressure as we go into the close.

 

At this point, the candle is more weak than strong. But we do not know if the volume is low volume or a lack of volume because of the time of day. With that said, the location makes me think it is No Demand and the Dollar should move higher (Euro move lower) on the open.

[BlowFish 10]

VSA question. Price in lazy downtrend, falling more than rising. Then price flatlines for many bars and volume goes down significantly. In VSA terms, would this mean "no demand" or "no supply"? Is there anything in this chart (attached) that suggests whether price will continue to go down or will rebound?

 

'Lazy downtrend' I immediately think corrective action especially on diminishing volume. I would see the whole days action of the chart you posted range bound.

 

Edit: that was in response to Tasuki

[winnie 10]

How to define narrow range and wide range ? Is there any method to well define it ?

 

Thanks

Winnie

 

First, Take a look at Eiger's excellent post. Very nice job.

 

A few definitions:

 

No Selling Pressure:

 

A narrow range or wide range bar with volume less than the previous two bars that closes down from the previous bar. Generally, strength enters ( or shows itself) on down bars.

 

No Buying Pressure:

 

A narrow range or wide range bar with volume less than the previous two bars that closes up from the previous bar. Generally, weakness enters (or shows itself) on up bars.

 

No Supply:

 

A narrow range bar with volume less than the previous two bars that closes down from the previous bar. With the next bar up.

 

Therefore, ALL No Supply bars are No Selling Pressure bars, but not all No Selling pressure bars are No Supply bars.

 

No Demand:

 

A narrow range bar with volume less than the previous two bars that closes down from the previous bar. With the next bar down.

 

Therefore, ALL No Demand bars are No Buying Pressure bars, but not all No Buying Pressure bars are No Demand.

 

 

During an Accumulation phase one can see both No Buying Pressure bars and No Selling Pressure bars. This is what we see at the right side of your chart. What Eiger calls a spring, VSA would call a high volume test. Markets can move up on a high volume test, but not very high (there is too much supply holding it down). What usually happens after such a test, is a move back down and a test into the area of the previous test (high volume area). Hence, we get the second test, which Eiger has correctly labeled on his chart as point D.

 

The volume on that second test is still high, although lower than the first test. This is not a good sign. We would really like to see a test with volume less than the previous two bars. At that point the market would be poised to move up.

 

If we were to see a dark WRB closing lower than that last test bar, then that would be a sure sign of weakness and the market would likely fall from there.

[winnie 10]

No Demand:

 

A narrow range bar with volume less than the previous two bars that closes down from the previous bar. With the next bar down.

 

Do you mean close up ?

I have little confuse in this.

 

thanks

Winnie

[CandleWhisperer 10]

How to define narrow range and wide range ? Is there any method to well define it ?

 

Thanks

Winnie

 

With apologies to the Supreme Court; I do not know how to define a wide range or narrow range bar, but I know one when I see it.

 

TG uses a range formula to determine bar range. It is just as easy to simply "eyeball" it. Eyeballing it works well with the extremes to be sure. The fact is, it is the extremes that we are most concerned with.

 

With No Demand, for the most part, you would want the bar to be narrower than the previous bar.

 

No Demand:

 

A narrow range bar with volume less than the previous two bars that closes down from the previous bar. With the next bar down.

 

Do you mean close up ?

I have little confuse in this.

 

thanks

Winnie

 

yes, closes up from the previous bar.

[Tasuki 10]

Thanks to all for your expert analysis of my chart. Here, as requested, is a chart with the broader context and some additional thoughts.

 

While it's true that the VSA experts consider carefully the context of a signal, it still seems that they analyze the market bar by bar.

Eiger was of course correct in pointing out that my chart didn't give the context, but that was intentional. What I was hoping was

that the pattern of the bars themselves would tell the story. For example, the VSA patterns that CW describes require only four

candles--the candle being analyzed, the previous two (to determine if volume is greater or lesser than the previous two) and the

bar following (which must be up or down for no supply or no demand, respectively).

 

Looking at my original chart in this way, Eiger has pointed out what CW calls a high volume test, on the candle one prior to the first

dotted vertical line (Eiger's point C). If I'm remembering correctly, Tom Williams would call this a "failed test", meaning that there

is more supply below. This is a sign of weakness. yes?

 

Furthermore, the Test at Eiger's point D is also NOT on volume lower than the previous two bars, but clearly greater than the previous

two bars. Yet another failed test, and another sign of weakness.

 

So, bottom line, even without the longer term context there were two candles showing clear (to me) weakness. The broader context

would only have reconfirmed your suspicions that a short trade was in order.

[kuky969 10]

Eiger

 

PLEASE I WOULD LIKE ASK YOU :

 

You wrote somewhere in TL ...." Narrow spreads accompanied by low volume as this market drifts lower indicates a lack of conviction to the downside. Compare this reaction (spreads, volume, distrance traveled, and duration) with the up moves on this chart. There was no conviction to the downside....."

 

Could you please recommend some sources for study EFFORT versus RESULT and WYCKOFF WAVES . I have in this subjects confusion.

 

Your contriobutions in this thread are for me very useful and thank you a lot for your willingness and patience with novice .

[winnie 10]

Dear all of you,

Would anyone tell me what is mean by "Hidden Test " and "Shake Out " Bar ?

 

Thanks

[kuky969 10]

This is continuation of Tasuki chart 15 min E-min SP

 

Eigers great contribution inspired me to this analysis

 

Market is oversold (under demand line ) but I not sure if is this line corerrectly draw.

 

area A green ...is climax -- heaviest volume from starting the trend , good acceleration in downtrend

 

area B continuation of down but poor volume -- expect of test

 

bar number 1 ... I call it TEST but in high volume ,next market go a bit up

bar number 2 .... I call it TEST on low volume (of last 3 bars) and less then previously test

 

 

next up move was about 90 points , on heavist volume from previous rallies in downtrend and short time .

 

 

I think this is signs of strength and we could go up as correction. WHAT DO YOU THINK PLEASE EIGER ???

 

Thank you.

 

http://www.sierrachart.com/userimages/upload_2/1223891744_94_UploadImage.png

Edited October 13, 2008 by kuky969

[Eiger 10]

...

Could you please recommend some sources for study EFFORT versus RESULT and WYCKOFF WAVES . I have in this subjects confusion....

 

 

In the days when Wyckoff was brokering, trading, and writing, there were no intraday indexes like we have today (e.g., SPX, DJI, NAZ, etc). There were market averages like the NY Times 50 and the DJI, but these were not available intraday (keep in mind also, that there were no real time bar charts of any kind - everything was done by hand off the ticker tape).

 

Wyckoff understood that the overall market had a substantial influence on individual stocks. When the overall market was bullish, for example, most individual stocks would rally. Wyckoff wanted a way to track the market during the trading hours. This was useful not only for day trading, but also to help determine the larger change of trends.

 

He developed the "Wave Chart." In his day, Wyckoff took the swing highs and lows of five leading stocks throughout the day to construct the chart. He found it useful in detecting the change in trend intraday, which he understood to occur 3-4 times a day, give or take. When strung together over several days, the wave chart helped him to see larger trend changes.

 

Wyckoff viewed the trend as the most important thing to know about the market.

 

“The most important thing to know about the market is the trend.” Richard D. Wyckoff, The Richard D. Wyckoff Course in Stock Market Science and Technique.

 

It was through the Wave Chart where you will first see the change in trend. He told us how to determine this:

 

“But you must always be on the lookout for a change in this immediate trend … This is how you detect the change: In an up trend, when the selling waves begin to increase in time and distance, or the buying waves shorten. Either or both will be an indication of a change in the immediate trend. Apply the same reasoning to a down trend.” Richard D. Wyckoff, A Course of Instruction in Tape Reading and Active Trading.

 

I use a Wave Chart and have attached an example. This is the Wave Chart of the 5-minute ES over the past few days. It is pretty obvious how the waves indicated a change in trend, at least for the short-term.

 

This is a proprietary Wave Chart. Several charting packages have indicators that can be adapted for wave charting. You can also eyball and/or draw a line for each wave. Thinking in waves and seeing the market in waves is highly useful. Another useful "trick" is to plot by hand the waves as they occur during the day. It is essentially what Wyckoff did and you will quickly learn to read the market in waves by doing this. The combination of waves and VSA indications is quite good.

 

Sources for learning and understanding the Wave Chart: There are two main sources. The Wyckoff Course in Stock Market Science and Technique describes the Wave Chart in Unit 2 and goes into some detail on how to read it in Unit 3. Wyckoff's 1932 "A Course of Instruction in Tape Reading and Active Trading" has lots of examples on using the Wave Chart and another daytrading chart combining volume and figures. Another useful source is the Trading Techniques Lecture Tapes: Back to the Books series done by George King. There is quite some discussion on the trend and the use of the Wave Chart in this series. All of these sources (and many more great resources) are available from The Wyckoff/Stock Market Institute at: http://wyckoffstockmarketinstitute.com/

 

All of the sources listed above also have detailed discussion on effort vs. results.

 

The Wave Chart was a vital part Wyckoff's method. I don't really think you can fully understand and trade Wyckoff's method without it - at least I personally wouldn't try to do that In any event, the Wave Chart is as useful today as it was in 1920.

 

 

 

Hope this is helpful,

 

Eiger

[zdo 20]

Thanks Eiger - but, in the past, when db put up similar 'wycoff' explanations in this thread you SCREAMed !!! Please watch the double standards...