[VSA] Volume Spread Analysis Part I

[Anonymous 11]

Here are a couple of charts showing how VSA is great with hindsight but not so great in real time trading.

 

I don't think VSA is worthless on a 5 minute chart but I don't think you can point at high volume and say "that's Professional Money!". We really have no idea who or what is behind a volume spike from one 5 minute period to the next. The 5 minute charts are useful if you're looking for the perfect entry but you're getting your directional bias from the 15 minute charts. That's why I think multi timeframing is an important part of VSA.

 

I don't think it's necessary to try and identify who is behind a volume spike. The important thing is to recognise that reversals occur on high volume around support and resistance areas.

 

 

 

The first thing I see on this chart are two small tops to the left that represent supply. Hence the large candle with Ultra High volume could be "Pushing thru supply". That means the volume is absorption volume as the smart money is willing to buy at higher prices. If they are willing to buy at higher prices, they must expect even higher prices.

 

As you have said, one timeframe is usually not enough for proper analysis.

[Anonymous 11]

A couple of charts......

Edited March 28, 2008 by mister ed
Add back chart

[BlowFish 10]

Hey PP,

 

85% is not such a leap really. Even if you accept this figure the problem remains that at least 35% of those 'professionals' are goig to be wrong! Certainly in futures markets. If you asume that a few 'retail' traders are correct (even if ocasionally) then the percentage is higher.

 

Now this dosent matter in my mind but as you may know from my odd posts in other threads I do think it is important getting core beliefs sorted out (which includes verification I guess) and of course making reasonable assumptions based on your own 'reality'.

 

Actually I have rather oversimplified the argument. On any trade there can be a winning player liquidating, a losing player liquidating, or someone opening. Jankovstky talks about who is on each side of a trade in his book (reviewed elswhere on the forums I believe).

 

This 3 legged equation kind of makes things hard, but the outcome over time is total winning capital = total losing capital it can be no other way. If all the losers are retail then they need to make up 50% of liquidity.

 

Final thought - we need a better term than smart money (we might get noTouch on board then ) JAJ talks about 'order flow' (though this term has existed way before he coined it). Perhaps this is a better term to describe money entering a market on a particulear side?

 

Cheers,

[notouch 10]

Where does this mysterious 85% figure come from? We're expected to take this figure as an article of faith on the basis of what - some guy on the internet having a guess?

 

There's no need to guess. The information is in the public domain. CBOT publishes it's Liquidity Data Bank which divides volume into locals (Cti1), commercial clearing members (Cti2), members filling orders through other members (Cti3) and members filling orders for the public (Cti4). In spite of me pressing the point no one in this thread has attempted to identify who "Professional Money" is. But let's assume that locals and commercial clearing members represent "Professional Money" and the public are not. Let's look at 27th February because that was a big day for YM. Total volume was 2,089,414. Breakdown by group was as follows: 362,997 (Cti1), 1,023,334 (Cti2), 6,421 (Cti3), 696,662 (Cti4). We can see from that that the public made up almost exactly a third of the volume, and only two thirds was due to "Professional Money".

 

What is even more interesting is the breakdown between buy volume and sell volume. It's interesting because there was almost an identical number of buyers and sellers in each group. Looking at the locals (Cti1) there were 182,292 buyers and 180,705 sellers. For the commercial clearing members there were 507,547 buyers and 515,787 sellers. For the public (Cti4) there were 351,724 buyers and 344,938 sellers. So this idea of the "Professional Money" always being right and the public always being wrong is nonsense. There were winners and losers in every group.

 

The market is a lot more complex than this "Professional Money" controls everything nonsense.

[JustMega 10]

NoTouch,

 

I agree with you on the first part of your post that 85% is baseless. Perhaps if one gauged all markets the percentage of 'professional money' would be close to that figure, who knows. Who is to say that 'smart money' consists of those working for some big firm with an exchange seat or those with billions in capital. Couldn't smart money consist of members of the public who are informed & educated, including some on this forum, as opposed to those who blindly bet on the markets? Maybe that would bring that figure up even higher.

 

As for the latter part of your post..."What is even more interesting is the breakdown between buy volume and sell volume. It's interesting because there was almost an identical number of buyers and sellers in each group. Looking at the locals (Cti1) there were 182,292 buyers and 180,705 sellers. For the commercial clearing members there were 507,547 buyers and 515,787 sellers. For the public (Cti4) there were 351,724 buyers and 344,938 sellers. So this idea of the "Professional Money" always being right and the public always being wrong is nonsense. There were winners and losers in every group."...these figures show only volume. Not where the 'smart money' or the public bought or sold at. If I had to venture a guess I'd probably say the percentage of 'smart money' selling near the top/buying near the bottom was greater than for the public in general.

 

Moderators, no offense but I think this thread has veered from its intended subject of VSA. Maybe the matter could be continued in a separate thread?

Thanks.

[Anonymous 11]

Hey PP,

 

85% is not such a leap really. Even if you accept this figure the problem remains that at least 35% of those 'professionals' are goig to be wrong! Certainly in futures markets. If you asume that a few 'retail' traders are correct (even if ocasionally) then the percentage is higher.

 

Not sure where you get your figures from.

 

Simply, within that 85% comes a percentage of the Smart Money that is wrong.

 

I really don't care.

 

What I do not understand, is why you do?

 

The price bar shows the composite opinion of the Smart Money (winners and the losers.) The winners make up a higher percentage of that whole, so we follow their actions. Smart Money losers do not stay that way for very long. THEY KNOW HOW TO READ A CHART. And can see when the rest of the Smart Money is doing the opposite .

 

Take a look at a chart. Ask yourself why there are large volume spikes at certain highs and lows. This goes against the general idea of what high volume means: high volume on an up bar MORE buying. High volume on a down bar MORE selling. Now if that were the case, then these areas would not be tops and bottoms to the degree that they are. In other words, something is going on underneath. Thus we need to ask, WHO is taking the other side of these trades? And why does this group seem to be on the right side at the right time?

 

As you said, this is a zero-sum game. Somebody is on the other side of these high volume trades at tops and bottoms, and we want to follow that group. Call them what you want. Of course, there is much more than trying to pick tops and bottoms going on; or at least if you are doing it right, there should be.

[notouch 10]

If I had to venture a guess I'd probably say the percentage of 'smart money' selling near the top/buying near the bottom was greater than for the public in general.

 

 

The Liquidity Data Bank goes into detail about that too. We can look at volume by price for the month of February. We can look at the price range 12747 to 12826. This price range is "the top" before the big 500 point fall. For commercial clearing members there were 167,765 buyers to 169,707 sellers. For the public there were 126,034 buyers and 123,895 sellers. So the commercial clearing members did marginally better than the public, but only by a tiny percentage. The full figures are in the image.

 

We still don't have a definition of smart money or professional money - are they necessarily the same thing? What about dumb professional money? The only definitition that makes any sense is the circular argument that to buy at the bottom and sell at the top is smart, so smart money must have been doing it. If that's what smart money is then I agree with it. But the implication that some people are making is that there's a particular type of trader (undefined) buying at the bottom and selling at the top. My invitations to identify them (e.g. are they investment banks, locals, pension funds, central banks or what?) have been ignored.

[traderxman 10]

Notouch,

 

Thank you for showing the results of ACTUAL volume that is recorded by the CBOT. I have spent time analyzing the LDB, MP's and bell curve's of most histogram looking for an edge as I am sure you have also.

 

The truth be told that trading in real time is about making money, that's all it is. If you are able to take your share than that is THE reward.

 

To argue about the should's and should'nt's on who does what to me is a red flag showing the colour "EGO".

 

When price falls down and makes a bottom...we are faced with asking what is large volume that will be used in this VSA analysis. If anything...what will quantify A ripe volume that needs to be analyzed.

 

Perhaps stating what we need (volume amount) to analyze (if their is an edge here) and then we can see how it closes etc.

 

Looking to learn and prosper!

[Anonymous 11]

"In any business where there is money involved and profits to make, there are professionals. We see professional diamond merchants, professional antique and fine are dealers, professional car dealers and professional wine merchants, among many others. All these professionals have one thing in mind; they need to make a profit from a price difference to stay in business.

 

The financial markets are no different and professional traders are also very active in the stock and commodity markets-these professionals are no less professional than their counterparts in other areas.....

 

It is important to realize at this stage, that when we refer to the definition of professional, we are NOT talking about the 'professionals' who run investment funds or pensions...........

 

So what do I mean by a professional trader? Well, one example is the private SYNDICATE trader that work in co-ordinated groups to accumulate (buy), or distribute (sell), huge blocks of stock to make similarly huge profits." Tom Williams, Master the Markets, p.14

 

Syndicate traders are secret, well-heeled, highly skilled, and happy that you believe (wrongly) what you believe.

[notouch 10]

Trading syndicates definitely exist but they don't account for anywhere near 85% of volume. Investment funds, mutual funds and pension funds, on the other hand, definitely account for much more than 15% of volume. I agree totally with what's written by Tom Williams in Master the Markets. What has really confused me is the claim that 85% of volume comes from professional traders. That figure doesn't appear in Master the Markets. Where does this figure come from? I also agree that trading syndicates (as well as hedge funds, specialists and market makers) are secretive but how could they be secretive if they accounted for 85% of the volume?

 

I agree with traderxman - it's not necessary to identify who does what. One can use VSA without worrying about what percentage of volume is "Professional Money" and who exactly this "Professional Money" is.

[Anonymous 11]

It can be found on some of the webinars. Unfortuntely, Todd does not do any education session for non software customers. He is the one that is always saying this figure. You are correct, it is not in the book.

 

He offers no "proof". As I have said, this is the "leap of faith" element in VSA for me. Yet, without this point or exact percentage, the rest of the story makes sense and is can be seen on various timeframes and in various markets.

 

Simply, don't let that number cloud you from the supply/demand dynamics that VSA points to.

 

If you look at enough charts, you will see upthrusts, for example. You will see them too much and in the correct places to chalk it up to chance.

[notouch 10]

VSA makes a lot more sense without that 85% concept. The way I interpret Master the Markets the professional traders are a minority only active during accumulation/distribution and upthrusts/downthrusts. As you say, the important thing is to focus on the supply and demand dynamics as you've illustrated very well in the charts you've posted.

[BlowFish 10]

Not sure where you get your figures from.

 

Simply, within that 85% comes a percentage of the Smart Money that is wrong.

 

I really don't care.

 

What I do not understand, is why you do?

 

-snip-

 

As you said, this is a zero-sum game. Somebody is on the other side of these high volume trades at tops and bottoms, and we want to follow that group. Call them what you want. Of course, there is much more than trying to pick tops and bottoms going on; or at least if you are doing it right, there should be.

 

Actually I really don't care either I obviously had not made that clear. I am a proponent of VSA and have been since Tom published his first edition. Having said that there are some 'issues' but thats for another post. Actually my point was to illustrate why I dont care - I am not sure I acccept the figure but it is irrelavant. I guess I am saying that Kruger quoting it as some how significant is disengenious and from various posts here it clearly does not advance the VSA 'cause'. The reason for challenging and clarifying is that I feel it is hugely important to have market beliefs that are founded on fundamental truths.

 

I get my figures where everyone else does ....the LDB.... however what I am offering is a simple mathematical truth. All I am saying is that in futures 50% of trading volume will be winners 50% will be losers. It can be know other way. If you accept 85% of trades are by profesionals (I don't particularly care either way but for the sake of argument lets say it is true). So assuming Krugers figure is correct and also asuming every single 'non professional' trader loses all the time (again from the LDB this isnt the case but hey lets run with it) if this is so 35% of the 'pros' must lose to retain the zero sum balance. 50% winners +35% losers = 85% pro.

 

When I looked at LDB data (just after P.S. published his first book) I could see nothing that gave much of an edge as notouch pointed out the 'pros' get it wrong almost as often as retail that was the big surprise.

 

To be honest I am not sure what Krugers point is when he quotes this figure? Perhaps you could elucidate? To me it seems irrelevant. Incidentally there are several old time VSAers I have met that are rather sceptical of the direction Tradeguider have gone, perhaps due to comments like that. I have to say I take what Gavin has to say with an even larger grain of salt

 

Anyway I am not trying to be confrontational:) ( I am pro VSA). So lets get back to VSA proper.

 

My big issue is acertaining if a huge chunk of volume entering the market is merely enough to pause it or possiby enough for more (accumulation/distribution to start). Context and subsequent bars hold the clue but sometimes it's quite subtle.

 

Cheers.

[BlowFish 10]

VSA makes a lot more sense without that 85% concept. The way I interpret Master the Markets the professional traders are a minority only active during accumulation/distribution and upthrusts/downthrusts. As you say, the important thing is to focus on the supply and demand dynamics as you've illustrated very well in the charts you've posted.

 

Succinctly put - you posted this in the 10 minutes it took me to compose my last post!!

[traderxman 10]

The value of a volume of "A Bar" that we need to be alerted to would be a nice topic? Since VSA I think suggests this bar is a sign...what is the sign amount of volume say for trading the mini-dow? Not trying to be confrontational...rather looking to learn.

[BlowFish 10]

traderX,

 

its a relative thing. Also it may not all enter on a single bar. You need to train your eye to see it really (its pretty easy). I look for 'roughly double' the volume. I also look for a volume 'hump' over a few bars. This is one of the things that indicates to me it may be a climax rather than a pause. A pause is usually a moderately high volume bar with wide spread followed by 1-3 (ocasionaly more) low volume bars. The open is usually tricky from a VSA point fo view as there is often a volume 'climax'.

 

If you want a simple yes/no for high volume try putting a moving average on the volume (actually 2 times a moving average works quite nicely).

 

Low volume is much easier generally what is required is volume that is less than the volume on the previous two bars. Thats the definition Tom always used and is still cncidered the 'norm'.

 

On the attached chart I have red for ultra high and pink for high. At the moment I am just messing round with a VSA study.

[traderxman 10]

OK thanks BF... nice looking chart, nice work. MultiCharts...had that one for a while...but seemed to be buggy...perhaps just me and my computer.

[Tasuki 10]

Please see attachemnt. Five minute chart ES today (Monday 6/18/07).

 

Question is typed on the chart--When you see a WRB with high volume, do you always think, "Ah, reversal in price is in the near future"? In other words, is this type of bar really nothing more than "stopping volume", or is there more to it than that? I can't find an example now because the situation is rare, but I swear I've seen one of these type of bars followed by a continuation of the price in the direction it was originally going (oftentimes, or maybe always, on even higher volume), and I coined a term, "pausing volume" instead of "stopping volume".

 

Are there any rules in VSA to help you determine whether price will continue or reverse after a WRB on high volume?

[notouch 10]

I prefer comparing volume bars to previous bars as far back as possible. Looking at today's 15 minute bars, for example, we can see that the reversal bar was higher than all of today's and Friday's volume bars except the first 15 minutes on Friday. If we look to today's 5 minute chart we see the reversal bar was higher than any today or on Friday. This all points to strong demand coming in on the lows of the day and potentially further strength ahead.

[traderxman 10]

Any chance there is a YM trader who can see VSA helpful for the 3 trades noted?

[Tasuki 10]

just an observation, FWIW:

Looking at the 15 minute chart of the same time as my last post (see attachment), it seems (to my eyes at least) that the 15 minute is so much clearer than the pattern on the 5 minute chart. I know that VSA, like everything else, is supposed to work better the longer timeframe you look at, but there's a point of diminishing returns, especially if you're an intraday trader. I mean, sure VSA (even MACD or RSI) would give better signals on a weekly chart than a 5 minute chart, but the weekly isn't all that useful (except as general direction) for daytrading. The stopping volume and the successful test on this 15 minute chart are so clear they reach out of your computer and smack you in the face. I haven't seen that kind of clarity with shorter timeframes, although I know that some folks use them (including me, up 'til now).

[Anonymous 11]

....... The way I interpret Master the Markets the professional traders are a minority only active during accumulation/distribution and upthrusts/downthrusts........

 

Nice.

 

There are a few key questions a trader needs to be able to answer:

 

* Why do we have Bull Markets?

* Why do we have Bear Markets?

* Why do markets sometimes trend strongly?

* Why do markets sometimes run sideways?

 

STRONG HOLDERS

 

Strong holders are usually those traders who have not allowed themselves to be trapped into a poor trading situation. They are happy with their position, and they will not be shaken out on a sudden down move, or sucked into the market at or near the top. Strong holders are strong because they are trading on the right side of the market.

 

WEAK HOLDERS

 

Weak holders are those traders who have allowed themselves to be 'locked-in' as the market moves against them, and are hoping and praying that the market will soon move back to their price level.

 

These traders are liable to be "shaken-out" on any sudden moves or bad news. Generally, weak holders will find that they are trading on the wrong side of the market, and are therefore immediately under pressure if price turns against them.

 

* A BULL MARKET occurs when there has been a substantial transfer of stock from Weak holders to Strong holders, generally, at a loss to the weak holders. (accumulation)

 

* A BEAR MARKET occurs when there has been a substantial transfer of stock from Strong holders to Weak holders, generally, at a profit to the Strong holders. (distribution)

 

It is about Supply and Demand. Volume represents little more than activity.

 

Forget about the 85% number. Volume Spread Analysis is not a house of cards built on the foundation of this notion.

 

What you need to understand is:

 

A. There is a group of traders that are consistently among the Strong holders. And because of that, they tend to trade with more size.

 

B. Large-sized Strong holders leave tracks:

-- When Volume is high, it is telling.

-- When volume is low it is still telling; when volume is low, nothing is being done, and that is telling.

 

C. Even when one attributes large volume to the retail trader (usually Weak holders), one must consider who is taking the other side of the transaction. If it were other retail traders, then 90% of all retail traders wouldn't fail.

 

There is little doubt that there is a group of traders who are consistently among the Strong Holders. Whether they are syndicate traders, hedge funds, pension funds, or banks matters little.

 

Whether any single individual amongst the group is always right, matters even less.

[Anonymous 11]

Tasuki;

 

Nice charts. Thank you for posting. Pleas keep them coming.

 

First of all, we need to clear up the issue of WRBs. Please remember that WRBs refer to the BODY of the bar: the distance from the open to the close. I see no open on your bars. Strict VSA does not look at the open and in fact usually leave it off of the bars as you do.

 

What you show there is a WSB (Wide Spread Bar). The spread (range) of the bar is indeed wide, but without an open on the bar we cannot know if it is a WRB.

 

I mention this as I do not want to confuse yourself and others. WRB analysis, in my opinion, is a natural fit with VSA, but only when you include the open. Tom, however, disregards the open.

 

Having said that, I really like your charts.

 

That bar is indeed a WSB with Ultra High Volume. If that bar was selling, then why is the close not on the low? Moreover, why is the next bar up? In fact the large bar is Stopping Volume. Momentum actually takes the market down further where we get a High volume Test/ Shake out.

 

In truth, based only on this timeframe, one might be looking to go short after the stopping volume. Take a look at the bar two bars later. It is a form of No Demand. Which is why more than one timeframe should be used.

 

As for your actual question, when we say the market does not like wide spread bars on high or ultra high volume, we mean that the volume may mask hidden selling/buying. To put it another way, if the bar is wide spread up on very high volume, then there can be some selling in the bar. Remember that most people see an up bar with high volume and think the bar is strong. VSA points to the possible weakness (changing supply/demand dynamic) underneath.

 

P.S. I see you put the 15 min chart in later. Now you have answered part of your own question . I really like the 5/15 timeframe combo.

[JustMega 10]

PP, you've already defined WRBs vs WSBs. In case Tasuki wants more info....Explanation of what is WRB Analysis

[BlowFish 10]

Any chance there is a YM trader who can see VSA helpful for the 3 trades noted?

 

Another Drumond man, thats unusual. VSA on a lower time period is a great way to see if focus time period geomatery is 'holding'. (Yes/No pattern).