Common Myths Concerning VSA

[Eiger 10]

There are many myths floating around about VSA. These can be quite confusing to traders interested in learning the technical craft of VSA. If adopted as truth, they can also be quite damaging to traders trading with VSA. Most of these myths center around arguements that, if we look a bit more carefully, are based either on misunderstandings of VSA or attempts to lead the unwary. You can be the judge of that

 

Myth #1: VSA is Frought with Unnecessary Jargon

 

I have to admit that I chuckle a bit at this one. VSA is based on the Wyckoff Method. The Wyckoff Method dates back into the early 1930s and is based on reading the market by its own actions. Wyckoff was a very early proponent of reading the charts and developed a set of definitional terms he used to describe what he saw in the charts. Here is a (partial) list of terms from Wyckoff's original manual (in no particular order):

 

Absorption

Distribution

Secondary Distribution

Accummulation

Buying Climax

Selling Climax

Technical Rally

Technical Rebound

Secondary Reaction

Secondary Test

Critical Position

Danger Zone & Danger Points

Upthrust

Hypodermics

Shortening of the Thrust

Corrective Reaction

Apex

Hinge

Springboard

Shake Out

Termial Shake Out

 

Quite a list. VSA, being based on Wyckoff, uses some (though not all) of these terms. Terms used in VSA that come from Wyckoff include Buying and Selling Climaxes, Upthrust, Accummulation, Distribution, Test, Shake Out, etc.

 

VSA streamlines Wyckoff to a certain degree, and such does not use as many of the terms that Wyckoff used. For example, Hypodermics is not found in the Williams text, nor is Secondary Distribution or Shortening of the Thurst.

 

VSA does add a few terms, however. No Demand is one new term. Stopping Volume is another. In truth, these are pretty straightforward terms when you think about it. No Demand simply means what is says - there is no buying or no demand. The same with Stopping Volume. It refers to volume that stops a trend. Not particularly arcane.

 

All professions have a technical language. Law, medicine, psychology, finance, marketing, carpentry, sport -- all have their own set of terms unqiue and specific to the discipline. The profession of trading is no different.

 

Although a technical language may seem exclusionary to an outsider, this is not the intention nor the objective of technical language. Technical language merely serves to facilitate communication between people within the profession. When one VSA trader says, "No Demand," for example, every VSA trader understands what is meant.

 

Communication is made easier and so is learning. I have seen many traders attempt to skirt the technical language only to 'see' and trade random patterns, thinking they were VSA. 'Seeing' selling come in, for example, because volume increases and a bar closes in the middle, they then take a short only to see the market turn on them and continue to advance. Loose descriptions of buying and selling/demand and supply seem on the surface to be more practical than the technical language. But, as every profession knows, loose terminology is neither useful nor practical. Traders avoiding the effort to learn the technical terms and their associated chart patterns quickly become frustrated and abandon VSA, many with a sour taste in their mouth.

 

Does VSA have a technical language? You bet, just like every other profession on this planet. And, as in every other profession, the VSA technical language facilitates both communication and learning. Don't get swayed by the myth that VSA is all jargon. It is not jargon. There is a purpose for the terms used. That purpose is to help you properly learn VSA and talk clearly about it.

 

Hope this is helpful.

 

Eiger

Edited January 26, 2009 by Eiger

[monad 10]

Eiger,

You have presented some very valid points. I like to use the best of both worlds.

As mentioned before, if somebody disagrees or has strong views against any method, best to leave it alone and move on, that way there is no room for unneccesary confrontation.

[Eiger 10]

...As mentioned before, if somebody disagrees or has strong views against any method, best to leave it alone and move on, that way there is no room for unneccesary confrontation.

 

Unfortunately, Monad, some have a history of consistently doing just the opposite of your sound recommendation.

[Shamal 11]

You are spot on Eiger, all professions have their unique terms, having had experience with lawyers. As was pointed out by others take away the main concepts from a method and prove for yourself if they work or not. if not, well on to something else.

[Eiger 10]

Myth #2 VSA Is No Different Than Just Following Price Action

 

Not really. Price is certainly an important component of VSA, but the real keys – as the name suggests – are volume and spread.

 

In Tom Williams’s outstanding book, The Undeclared Secrets that Drive the Stock Market, he makes special note that volume is the key indicator of the professional traders. It is how we, as VSA traders, can track the activity of those market participants who matter most, the professional money.

 

Volume is crucial because it tells us the level of involvement of the professional trader. Only the professionals can generate the high volume seen at nearly every market turn. Their absence is also easily seen following certain background conditions when volume is significantly low. Volume is so important in VSA that Tom recommends that traders train themselves to look at the relative volume before looking at the price bar when analyzing a chart.

 

Spread is also very important and is looked at next, after volume. Spread (the range of the price bar from high to low) represents trading activity – the wider the spread, the greater the activity. Combining the volume with the spread can reveal much about current market movement. Increasing volume on widening spread, for example, indicates continuation of the current movement. High volume and narrow spread, on the other hand, can indicate a stopping of movement. Spread also relates to professional activity – only professionals, for example, are able to cap a market (i.e., sell into active buying leaving the spread narrow on high volume).

 

After volume and spread are assessed, we next look at the close and the relation of the close to the preceding close(s).

 

Thus, although price is important, volume takes precedence, not price. Following price without volume is something different than VSA.

[kevinthetrader 10]

Can u bust some other myths... if there is any

 

For eg? VSA does not weed out low volume stocks.........this can create traps where we are deliberately been fooled by a relatively high volume in some low volume stocks which makes no sense

 

I hope u got it....EIGER

[bomberone1 10]

Geat post, but all stuff that u tell are necessasry to learn VSA?

[MightyMouse 12]

Myth #2 VSA Is No Different Than Just Following Price Action

 

Not really. Price is certainly an important component of VSA, but the real keys – as the name suggests – are volume and spread.

 

In Tom Williams’s outstanding book, The Undeclared Secrets that Drive the Stock Market, he makes special note that volume is the key indicator of the professional traders. It is how we, as VSA traders, can track the activity of those market participants who matter most, the professional money.

 

Volume is crucial because it tells us the level of involvement of the professional trader. Only the professionals can generate the high volume seen at nearly every market turn. Their absence is also easily seen following certain background conditions when volume is significantly low. Volume is so important in VSA that Tom recommends that traders train themselves to look at the relative volume before looking at the price bar when analyzing a chart.

 

Spread is also very important and is looked at next, after volume. Spread (the range of the price bar from high to low) represents trading activity – the wider the spread, the greater the activity. Combining the volume with the spread can reveal much about current market movement. Increasing volume on widening spread, for example, indicates continuation of the current movement. High volume and narrow spread, on the other hand, can indicate a stopping of movement. Spread also relates to professional activity – only professionals, for example, are able to cap a market (i.e., sell into active buying leaving the spread narrow on high volume).

 

After volume and spread are assessed, we next look at the close and the relation of the close to the preceding close(s).

 

Thus, although price is important, volume takes precedence, not price. Following price without volume is something different than VSA.

 

In order to get the full benefit from VSA or wychoff, you have to consider total volume or total market open interest for a security. Published volume is really only what the symbol traded on the given exchanges. However, you can purchase a security as part of a futures contract, an option on a futures contract, an option on the security itself, a sector etf, etc.

 

The more of those you can include, the better the volume picture you will develop and VSA will perform better for you. If you are a trader who wants to use VSA on an instrument like ES and plan to use the volume of only ES, then the above statement is not a myth, since ES volume only gives you a sliver of needed volume information and trading with price action alone will produce similar results. You can certainly try to use only ES volume with VSA, but a monkey will get it right too by throwing darts at 2 circles labeled long and short, but it doesn't need software to do it.

 

MM

[BlowFish 10]

Myth #3: You need expensive software, subscription clubs, or courses to master VSA.

 

There are less than a dozen fairly simple principles to master (though a certain famous software package simplifies them into 450+ indicators). The definitive source that has all the information you need is Toms original book.

 

Eiger nice to see you posting again. This was not directed at you though I do see you are doing the odd gig for the 'TG evil empire'. Still better that it's you than the professional marketeer and master, ninja, expert in his own under pants.

[joshdance 10]

The more of those you can include, the better the volume picture you will develop and VSA will perform better for you. If you are a trader who wants to use VSA on an instrument like ES and plan to use the volume of only ES, then the above statement is not a myth, since ES volume only gives you a sliver of needed volume information and trading with price action alone will produce similar results.

 

MM, as I'm pretty new to the subject of VSA, what other volumes would be relevant when trading ES?

[MightyMouse 12]

MM, as I'm pretty new to the subject of VSA, what other volumes would be relevant when trading ES?

 

You would want to use any volume that is related to the s&p 500 which is the underlying instrument of the S&P emini (ES). You will notice that there are times where the volume, for instance, on the ES has a dramatic increase and the S&P volume of all the stocks traded in the S&P did not have a dramatic increase in volume. The dramatic volume from the futures contract may generate a signal where as if you were using the S&P 500 volume you would not be entering or exiting the market. To me this leads to a discussion of whether one leads the other, which tells me that sometimes one does and sometimes the other does. If that is the case, then the value of the signal is watered down if you cannot gauge the complete volume picture. So using price along is probably a cleaner approach.

 

I am not suggesting anything about the software since i have never even seen it, but fundamentally, I wouldn't use it with ES for the aforementioned reasons unless I could get a complete picture of the volume traded.

[srag&birdie2 10]

You would want to use any volume that is related to the s&p 500 which is the underlying instrument of the S&P emini (ES). You will notice that there are times where the volume, for instance, on the ES has a dramatic increase and the S&P volume of all the stocks traded in the S&P did not have a dramatic increase in volume. The dramatic volume from the futures contract may generate a signal where as if you were using the S&P 500 volume you would not be entering or exiting the market. To me this leads to a discussion of whether one leads the other, which tells me that sometimes one does and sometimes the other does. If that is the case, then the value of the signal is watered down if you cannot gauge the complete volume picture. So using price along is probably a cleaner approach.

 

I am not suggesting anything about the software since i have never even seen it, but fundamentally, I wouldn't use it with ES for the aforementioned reasons unless I could get a complete picture of the volume traded.

 

This kinda response tells me you think too much! Way too complex, bro.

 

If you trade the ES, jus use the ES vol. Don't complicate yur life

[joshdance 10]

Thanks for the info MM.

[MightyMouse 12]

This kinda response tells me you think too much! Way too complex, bro.

 

If you trade the ES, jus use the ES vol. Don't complicate yur life

 

Its all about getting people to pay you when you enter the market. I choose to get as true a reading as possible so that I am not acting like a monkey throwing darts, or worse, so that I am not getting sucked into a trap by other traders seeking to extract money from me. Unfortunately, i need to expend thought which I do not mind doing. Others may try to do it with less thought. All I can hope is that they trade the same markets I do.

[alcontado_80 10]

there are only two mytho:missy:

[YertleTurtle 10]

You would want to use any volume that is related to the s&p 500 which is the underlying instrument of the S&P emini (ES). You will notice that there are times where the volume, for instance, on the ES has a dramatic increase and the S&P volume of all the stocks traded in the S&P did not have a dramatic increase in volume. The dramatic volume from the futures contract may generate a signal where as if you were using the S&P 500 volume you would not be entering or exiting the market. To me this leads to a discussion of whether one leads the other, which tells me that sometimes one does and sometimes the other does. If that is the case, then the value of the signal is watered down if you cannot gauge the complete volume picture. So using price along is probably a cleaner approach.

 

I am not suggesting anything about the software since i have never even seen it, but fundamentally, I wouldn't use it with ES for the aforementioned reasons unless I could get a complete picture of the volume traded.

 

Personally I find that using tick volume is superior to contract volume as you can't hide activity from the market. Contract volume can be hidden. This idea of tracking all volume pertaining to an instrument is silly. Volume in the spot and futures market are highly correlated so summing them together won't get any new picture.

[joshdance 10]

Personally I find that using tick volume is superior to contract volume as you can't hide activity from the market. Contract volume can be hidden. This idea of tracking all volume pertaining to an instrument is silly. Volume in the spot and futures market are highly correlated so summing them together won't get any new picture.

 

What is "tick volume" compared to "contract volume"?

[YertleTurtle 10]

Tick volume is basically the number of price changes during your specified time interval regardless to the actually number of shares or contracts or handles or whatever traded. Contract volume (for futures) is the number of contracts traded as reported to the exchange.

 

For spot forex only tick volume is available since there is no central exchange. There are plenty of successful forex vsa traders.

[joshdance 10]

Tick volume is basically the number of price changes during your specified time interval regardless to the actually number of shares or contracts or handles or whatever traded. Contract volume (for futures) is the number of contracts traded as reported to the exchange.

 

I was afraid you'd say that, but I wanted to give you an opportunity to clarify yourself first. So, you're saying that it's actually MORE accurate to ignore actual traded volume, and instead consider the number of trades or price changes? As I reread your statement, it sounds as if you're equating the number of price changes as something the market can't "hide," but that it can hide traded volume? Am I right?

 

EDIT:

I will work off the assumption that this is what you're saying. If that is the case...

 

Price changes mean very little. Your bucket shop broker (or someone else's if you do business with the less crooked ECN's) has no obligation to report the same price to you that another broker reports to someone else, trading the same currency pair, much less changes in price. They determine the quotes, and that's what you get--what THEY decide. So forget the fact that price changes don't mean anything, ticks don't mean anything--even the quotes are what the bucket shop decides to quote you for goodness sakes...!! You should read ROSO if you want to learn more about the bucket shop business back in 1900 when Livermore got his start, it's quite entertaining and really not much different from today.

 

At any rate, way back when MM made that post, he was talking about the equities futures market, something you clearly do not trade, or you wouldn't be saying the things you are saying. There is a general correlation between the volume of the issues in the cash index and the futures market, and associated derivatives. However, pull up a chart of the ES contract, and compare the volume with SPY. You will notice non-negligible differences in traded volume on some days, or some parts of the day. MM was simply saying, if I recall, that one volume source alone may not tell the whole story.

Edited March 26, 2012 by joshdance

[YertleTurtle 10]

you can purchase a security as part of a futures contract, an option on a futures contract, an option on the security itself, a sector etf, etc.

 

The more of those you can include, the better the volume picture you will develop and VSA will perform better for you. If you are a trader who wants to use VSA on an instrument like ES and plan to use the volume of only ES... ES volume only gives you a sliver of needed volume information and trading with price action alone will produce similar results. You can certainly try to use only ES volume with VSA, but a monkey will get it right too by throwing darts at 2 circles labeled long and short, but it doesn't need software to do it.

 

MM

 

Asking a question that you know the answer to so you can go on the offensive seems in poor taste.

 

I am fully aware that different forex brokers have different liquidity and therefore different tick volume. You can also get tick volume on some platforms for futures if one prefers. Its a bit extreme to say that ticks "don't mean anything" when they are clearly correlated to contract volume. The spot forex market has 10x the liquidity of the futures market. There are good brokers and bad and any trader should do research before choosing one. VSA is about relationships not absolutes so we don't need accurate contract volume to trade using VSA principles - tick volume is good at showing the relative difference in these relationships. Big players in the futures markets can hide their volume for up to 36 hours - they cannot hide their activity.

 

If you look at MM's statement he is clearly indicating that you need to be aware of all volume, spot, futures and options in order to successfully trade VSA on an instrument. I think this is wrong and there are enough VSA traders doing just that to throw out his monkey/dart theory.

[joshdance 10]

Its a bit extreme to say that ticks "don't mean anything" when they are clearly correlated to contract volume.

 

I only said that your so-called "tick volume" from a bucket shop doesn't mean anything, as it's unverifiable. Just my opinion of course, you obviously feel different and I respect that.

 

Big players in the futures markets can hide their volume for up to 36 hours - they cannot hide their activity.

 

Their volume IS their activity... how can they hide volume for 36 hours?

[BearBullTrading 10]

...... However, pull up a chart of the ES contract, and compare the volume with SPY. You will notice non-negligible differences in traded volume on some days, or some parts of the day.....

 

Beware the ETF trap..?

 

"..While the price of an ETF closely tracks the underlying index's value, the volume of an ETF only reflects the popularity of the ETF itself - NOT THE SUPPLY OR DEMAND FOR THE THING THE ETF TRACKS...(authors Capitals)"

 

From here...

BEWARE THE "ETF" TRAP - ChartWatchers - StockCharts.com Blogs

 

Cheers...

[YertleTurtle 10]

Their volume IS their activity... how can they hide volume for 36 hours?

 

Dark liquidity - Wikipedia, the free encyclopedia

 

One of several examples.

[MightyMouse 12]

Asking a question that you know the answer to so you can go on the offensive seems in poor taste.

 

I am fully aware that different forex brokers have different liquidity and therefore different tick volume. You can also get tick volume on some platforms for futures if one prefers. Its a bit extreme to say that ticks "don't mean anything" when they are clearly correlated to contract volume. The spot forex market has 10x the liquidity of the futures market. There are good brokers and bad and any trader should do research before choosing one. VSA is about relationships not absolutes so we don't need accurate contract volume to trade using VSA principles - tick volume is good at showing the relative difference in these relationships. Big players in the futures markets can hide their volume for up to 36 hours - they cannot hide their activity.

 

If you look at MM's statement he is clearly indicating that you need to be aware of all volume, spot, futures and options in order to successfully trade VSA on an instrument. I think this is wrong and there are enough VSA traders doing just that to throw out his monkey/dart theory.

 

Read back a bit. I said that the more the better and named a few of the others that impact volume but are not directly seen. All to mean better than using just the futures contract volume.

 

I would be interested in leaning about the traders who trade using VSA and are successful using only the contract volume.

[joshdance 10]

Beware the ETF trap..?

 

"..While the price of an ETF closely tracks the underlying index's value, the volume of an ETF only reflects the popularity of the ETF itself - NOT THE SUPPLY OR DEMAND FOR THE THING THE ETF TRACKS...(authors Capitals)"

 

From here...

BEWARE THE "ETF" TRAP - ChartWatchers - StockCharts.com Blogs

 

Cheers...

 

I'm not quite sure what relevance this has here...?

 

The author highlights one of my points -- that an ETF like SPY will have non-negligible differences with related products like ES, or the underlying cash stocks.

 

If the take home message is "don't use indicators for SPY," well, I agree! But if the market buys SPY heavily, arbitrage WILL cause buy programs to buy the basket of S&P 500 stocks. The futures contract, the ETF, and the stocks that comprise the index are all inter-related. Someone may buy ES, and sell SPY to hedge, vice versa, and so on... SPY is not just some separate entity whose demand and supply do not affect underlying stocks, or the futures contract. They are all related, and all affect each other.

 

For me personally, when I use volume analysis, I only use ES, and do not reference SPY.

Edited March 27, 2012 by joshdance