[VSA] Volume Spread Analysis Part I

[tech/a 10]

TG

 

Initially you said.

 

Would I on a break above the highs of those 3 bars, sure. It's obviously showing that the old support is now resistance, so if there can be a break of that, then I'd be looking long on a test of that broken resistance.

 

Now you need to see a test of this bar, I'm intersted in why?

So if price just continued up then you'd not be on the trade?

Price has now moved a great deal from the initial "Setup" or Test bar.

Isnt the risk if trading long on this setup becoming too great?

 

I maybe wrong but Id have thought your buy (given the above in quotes) would have been the break with a stop below the second bar.

 

TG What "sort" of trader are you?

 

How do you incorporate VSA into your trading?

[TinGull 10]

TG

 

Initially you said.

 

 

 

Now you need to see a test of this bar, I'm intersted in why?

So if price just continued up then you'd not be on the trade?

Price has now moved a great deal from the initial "Setup" or Test bar.

Isnt the risk if trading long on this setup becoming too great?

 

I maybe wrong but Id have thought your buy (given the above in quotes) would have been the break with a stop below the second bar.

 

TG What "sort" of trader are you?

 

How do you incorporate VSA into your trading?

 

You would be wrong in making that assumption. The second sentence in the quote you put of mine in the post was

 

"It's obviously showing that the old support is now resistance, so if there can be a break of that, then I'd be looking long on a test of that broken resistance"

 

I reiterated that statement by saying I wanted a test of old resistance to know a long should be taken. If the test never appeared and price shot higher, absolutely I'd have been out of luck with that trade. no big deal since there's plenty of fish in the sea.

 

As for what sort of trader I am...I'm a cautious one. How do I incorporate VSA in my trading? Exactly how I just said I would trade that chart. When there's resistance and price breaks it, I wait for a test of that old resistance to make sure the pattern isn't a failure. If it is a failure, I'll play that failure for sure since those are my favorite plays. If support is broken, then I'll play a short on a No Demand bar as it retraces to the previously broken support.

 

While price has now moved away from the initial test bar, that test occurred under a resistance point. I never go long right under resistance, nor would I ever advocate that someone do that.

[tech/a 10]

Thanks for that clarification.

Pity there aren't more people joining in the discussion with opinion.

 

You wouldn't be a Market Profile trader would you?

From your avatar.

[TinGull 10]

Yea, but it is saturday. I know I wish I could stay away from the computer on weekends, but alas...she sings her musings and I must come hither...

 

 

I sure am a MP trader

[mister ed 10]

Pity there aren't more people joining in the discussion with opinion.

 

 

Geez tech, I can't even keep up with this thread, it is moving so fast.

 

OK, so a contribution, this will be more along the lines of execution/trade location comment - from your questions put to Tin I suppose the implication is you would have been buying earlier, would you have bought on the breakout or even before then? (Do questions count as contributions?)

 

When you use Elliot in combination with VSA does the Elliot analysis give you more "confidence" (for want of a better word) to buy this VSA set-up on the break above the high (approx the 82 cent level), or even earlier?

 

The big advantage of an earlier entry, and not just the obvious one that you buy at a cheaper price and therefore make more money, but in the big picture, across numerous trades, doing so consistently is going to skew the risk down (your stop is closer if the set-up doesn't play out) and you skew the return up (you've got a lower entry price, so assuming the exit price would be the same irrespective of your entry price there is a greater profit). So from a risk/reward perspective the earlier/lower the entry the better. Also, from a momentum perspective, an entry before the break, or as it is occurring, gives you the benefit of that burst of momentum working in your favour. If the burst is enough to cause you to raise your stop loss, even better again.

 

I suppose this is also where your question "what sort of trader are you?" comes into play.

 

If you are playing this set-up for a short-term swing in price, say you are looking for 5 to 10 cents profit, or whatever, then entering a cent or two earlier will again make a big difference, and again not just on this trade, but done consistently over numerous trades - better risk/return ratio.

 

On the other hand if you are playing for a longer-term move, say 50 cents on this 80 cent share, or again whatever, then a 1 or 2 cent difference in the entry price may not be judged as important, it being judged better to see a re-test of the breakout before committing to a longer-term hold? Then again (this is where I need a third hand) an earlier entry even with longer-term holds in mind will give you the benefit of that initial momentum burst (if it comes) and the opportunity to raise the stop loss - on the numbers with holding the position for a longer term move the benefits to the risk return equation could be even greater than with short-term holds.

 

This is not VSA, sorry, but is related to the combination of VSA with Elliot and the potential benefits of an earlier/cheaper entry from a risk/reward perspective.

[tech/a 10]

Mister ed.

 

Yes your right on the money with regard to R/R.

Leave a trade to long and R/R becomes a definate issue with regard to timeframes.

All will become clearer with this example as we go along.

 

I'm actually attempting to answer or more so clarify a few statements made here by others.

As for Elliott yes for me this is the case,better timing means smaller risk,and better R/R over shorter periods which mean more trades which mean better profit.(In my timeframe/s).

 

But this exercise is based purely around VSA.

 

So to the next chart.

Is this following bar then showing lack of supply or lack of demand and why?

 

Is this a test or is the range and volume on the previous bar a sure sign of a new era of fresh buying.

Selling exhausted.

Following this comment on a test

 

A failed Test will have high volume. That is why it fails.

 

 

[mister ed 10]

 

I'm actually attempting to answer or more so clarify a few statements made here by others.

 

But this exercise is based purely around VSA.

 

 

Tech, yes sorry sidetracked your post and the thread. OK, to this latest chart.

 

It is a bit difficult to get a read on the volume, the scale being thoroughly distorted by that massive volume bar. But by looking at the relative volume, while the volume has plummeted it is still healthy looking.

The previous massive volume day I don't think was absorption buying (I think thats the right term) as it really hasn't cleared much supply to the left.

The price is showing a lower high and a low close on the day, there is still selling happening, on still healthy volume. I would say then the latest day is showing a lack of demand.

[tech/a 10]

Ed

 

The bar in question is 50 million

The average form the latest high to this bar is 900,000.

[TinGull 10]

I wouldn't say it's a lack of demand, but looks like it'd just be simple profit taking after a 9% move in the stock in a single day. Since it didn't close on or near it's highs, I wouldn't consider this a "test" either...but since it did come down to the point where I would enter and stopped...I'd be nibbling here for sure. I'd put out a marker lot and enter more if it goes my way on another low volume test.

[tawe trader 10]

A failed Test will have high volume. That is why it fails.

 

Yes, it isn't until you have a understanding of VSA that you see how and why double bottoms occurs.

 

A successful double bottom is where the mkt has had a successful test ie another low but on lower volume than the first low.

 

If you have a failed test the mkt has to go back down again for a third time to 'test' for any excessive supply. If there is none, the mkt is 'free' to be taken up and thus you see a Triple bottom (or a low and two more slightly rising lows).

[tawe trader 10]

Here is something to think about when trading Futures and looking for low volume 'tests'.

 

The following quote is taken from a very successful FTSE Futures trader.

 

However, whilst low volumes are essential for test bars in the underlying cash index (showing a lack of supply), futures markets can create similar test bars on higher volume (because traders pile into the future on sight of the cash index test bar), so this is not necessarily a negative indicator.

[mister ed 10]

Here is something to think about when trading Futures and looking for low volume 'tests'.

 

The following quote is taken from a very successful FTSE Futures trader.

 

However, whilst low volumes are essential for test bars in the underlying cash index (showing a lack of supply), futures markets can create similar test bars on higher volume (because traders pile into the future on sight of the cash index test bar), so this is not necessarily a negative indicator.

 

I reckon thats a pretty good observation.

[tech/a 10]

However, whilst low volumes are essential for test bars in the underlying cash index (showing a lack of supply), futures markets can create similar test bars on higher volume (because traders pile into the future on sight of the cash index test bar), so this is not necessarily a negative indicator.

 

Possibly having a blond Seniors moment!

But seeing a test in the cash I cant see how this can be seen as a positive move for the futures (unless of course for the short side).

Why on earth would you go long on a confirmed test showing lack of supply?

[tawe trader 10]

Why on earth would you go long on a confirmed test showing lack of supply?

 

If you are looking to go long you want a lack of supply, otherwise as the mkt rises, supply will come in and possibly swamp the demand which would lead to a premature end to the rally.

[tech/a 10]

Of course of course!!!!!:crap:

 

That WAS a dyslexia moment.:doh:

 

Thanks back to my bingo game!

[tawe trader 10]

No probs tech/a we are all prone to our blond moments.............

 

I think the biggest eye-opener for me after being introduced to VSA is that it show's that the mkts are definately not random and it is one big game. 'Those in the know' will push the mkt around to suit their own interests, which is perhaps why most T.A. fails. 'They' will take the mkt to a level they want it go and just because some indicator has made a crossover (or flashed a buy signal) doesn't mean it is going to stop it.

 

They will let the mkt fall (or drive it down) during bad news, like the last week or so, whilst quietly accumulating positions. They need all the weak holders and major sellers to be forced out and they check by 'testing'. They take the mkt down again, past their pain threshold. If there are no more sellers coming in then there is obviously less/no resistance to any rises.

 

If anyone believes what I have said above is wrong, please feel free to correct me, as I am still learning everyday.

[Soultrader 12]

Here is a chart from todays trading day.

 

 

First trade was taken at 15110 around 9:03am. Premarket SGX rallied into the previous day value. As Osaka opened, price opened within the previous day value to rally about 90 yen (roughly $900 a contract). Price then retraced back to the value low pivot. I took a long as price was falling because internals showed strenght and market analysis was telling me that prie would rotate back into value. Price dropped 50 yen ($500 a contract) as soon as I went long. My usual stop is 40yen but I did not notice any heavy selling. The bid was thin and I figured it was a price slip due to fast price action and buyers were slow to step on the bid. Price then came back to my entry point and I was conviced price would lift. This all happened in about 30-45 seconds.

 

My exit was at 15200 as 00 levels are usually met with strong selling/buying. Took 90yen off this trade.

 

Trade #2 was a short at 15180 as price met resistance at 15200. I exited right away at 15190 for a 10yen loss. Usually sellers will step in to dump 300+ lots at the 00 levels. However, only 1 big lot trader sold and the currencies (yen) started to rally. I exited immediately for a loss.

 

Trade #3 was a long at 15100 as price was declining. I felt good about this trade at VAL but as soon as price lifted to 15130, 400+ lot seller came right back. I exited asap at market for +20yen. I got lucky on this one.

 

Trade #4 was at the blue arrow. Price reversed and came back to the opening low. I waited for the decline to finish by reading volume. The upbar on high volume after the decline was my signal and I entered a long at 15010. However, sellers showed up at 15060 which to be honest scared the crap out of me and I booked at 15040 for +30yen. I exited extremely early but the tape at that moment looked pretty bad to the long side. Only when 400-500 lot traders started buying again did price lift.

 

Trade #5 was at the doji and hanging man candlesticks at the attempt to test the high of day. My short entry was at 15190. Price rallied 40yen upwards and then bam! Two 350+ lots got dumped sending prices lower. The decline from 15230 to 15150 took seconds as 300+ got sold at the bid. The bid/ask became extremely thin hinting warning signs as panic situations tend to cause price to jump everywhere. I sent a limit order at 15150 immediately for +40yen. Of course, my usual thing seems to be taking profits too soon. But with the Nikkei, I aim for 60yen (6 ticks) a day.

 

Todays trading took 180yen (18ticks), 3 times my usual daily goal. Overall it was a crazy day but patience paid off.

 

Chart shows explanations on volume and candle analysis. I also watch the yen as it affects exporters heavily which can impact the Nikkei index. I also use a few custom internal tools that measure net change relative to the opening price instead of the previous day close. Also a few custom TRIN, PC Ratio, TICK indicators.

 

Note: This is not typical Nikkei action. Rarely will you see such huge intraday swings so aiming for +60yen trades everytime will kill you. There were days when the ATR was 60yen. Lately it is 180yen.

[jjthetrader 10]

Does my example below look like a market that is about to rise?

With all these signs of weakness with weakness in the background it struck me odd that this market should take off.

 

First I saw hidden potential selling, upthrusts, reversals, no demand.

Any ideas on what I'm missing here?

Could this have been accumulation rather than distribution?

I kept watching for a short to come my way, finally took a small one but never saw the dropping off that you would expect with this much weakness.

 

In the boot camp Tom Williams said that a weak bar showing up on a 15 min chart would produce weakness for 15 min. Is this what people find?

Could my weakness in my example just be a bunch of temporary weaknesses that were overcome easily?

[Anonymous 11]

"Markets will frequently have to rest and go sideways after any high volume up-days, because the selling has to disappear. Remember, selling is resistance to higher prices! The best way for the professional traders to find out if the selling has disappeared is to 'Test' the market-that is, to drive the market down during the day (or other timeframe) to flush out any sellers. If the activity and the volume are low on any drive down in price, the professional traders will immediately know that the selling has dried-up. This now becomes a very strong buy signal for them." Master the Markets,Tom Williams P.39

 

 

Nice chart of a couple of would be signs of weakness that are actually signs of strength in their failure to produce weak results.

 

Markets do not like high volume on up days (bars) as it could contain selling within them. Hence, very often after a high volume up day (bar) the market moves sideways. On the 5 this is what happens after we see the Squat. Notice that the market basically moves sideways on this flood of supply (selling). Within this sideways action, we get an Effort to Fall candle. This is an attempt to move the market down. Yet, note that price does not trade lower on a closing basis. A few candles later, we see a Test. An Effort to Fall, which is a WRB, without result than a Test for supply within its body.

Edited March 29, 2008 by mister ed
Add back chart

[Anonymous 11]

Does my example below look like a market that is about to rise?

With all these signs of weakness with weakness in the background it struck me odd that this market should take off.

 

First I saw hidden potential selling, upthrusts, reversals, no demand.

Any ideas on what I'm missing here?

Could this have been accumulation rather than distribution?

I kept watching for a short to come my way, finally took a small one but never saw the dropping off that you would expect with this much weakness.

 

In the boot camp Tom Williams said that a weak bar showing up on a 15 min chart would produce weakness for 15 min. Is this what people find?

Could my weakness in my example just be a bunch of temporary weaknesses that were overcome easily?

 

 

Just a quick observation that can be totally off the mark. You have a blue line on your chart. I am assuming that this is a pivot line or Market Profile value area line or Fib retracement line. In other words, the blue line is delineating an area where you should be looking for certain price/volume clues.

 

 

Now look at the portion of the chart in the circle. Note that there was high volume up bar which contained some selling. But a few bars later the Professional Money is Testing for supply right around this line. The point: of all the things you have arrows on, the most important ones come near this "pivot area". That is the reason you have the line on there: to focus you to changes in supply and demand at certain predetermined levels. See my previous post as it also speaks about the circled area on this chart.

 

Also, I would add that if that high volume bar is also a WRB, then I would have the type of set up I like to talk about. While most of the areas you have marked don't actually become trade set ups as I see them.

Edited March 29, 2008 by mister ed
Add back chart

[Soultrader 12]

"Markets will frequently have to rest and go sideways after any high volume up-days, because the selling has to disappear. Remember, selling is resistance to higher prices! The best way for the professional traders to find out if the selling has disappeared is to 'Test' the market-that is, to drive the market down during the day (or other timeframe) to flush out any sellers. If the activity and the volume are low on any drive down in price, the professional traders will immediately know that the selling has dried-up. This now becomes a very strong buy signal for them." Master the Markets,Tom Williams P.39

 

 

Nice chart of a couple of would be signs of weakness that are actually signs of strength in their failure to produce weak results.

 

Markets do not like high volume on up days (bars) as it could contain selling within them. Hence, very often after a high volume up day (bar) the market moves sideways. On the 5 this is what happens after we see the Squat. Notice that the market basically moves sideways on this flood of supply (selling). Within this sideways action, we get an Effort to Fall candle. This is an attempt to move the market down. Yet, note that price does not trade lower on a closing basis. A few candles later, we see a Test. An Effort to Fall, which is a WRB, without result than a Test for supply within its body.

 

Hi Pivot,

 

Can you explain what a squat is? Was there an explanation somewhere in Master the Markets?

[TinGull 10]

Squat's are dojis on a narrow range, I believe.

[Wookey 10]

The name Squat comes I believe from Bill Williams' book. It's a bar which has higher volume and narrower range than previous one. Tom Williams also siggests paying attention to narrow spread bars with high volume.

 

Wookey

[Soultrader 12]

Squat's are dojis on a narrow range, I believe.

 

The name Squat comes I believe from Bill Williams' book. It's a bar which has higher volume and narrower range than previous one. Tom Williams also siggests paying attention to narrow spread bars with high volume.

 

Wookey

 

 

Thanks Tin and Wookey,

 

Should squat bars be taken as a reversal bar? Pivot mentioned squat supply bar will cause the market to go sideways. Why is this the case?

[Anonymous 11]

Hi Pivot,

 

Can you explain what a squat is? Was there an explanation somewhere in Master the Markets?

 

Hello Soultrader, glad you're still keeping an eye on this thread. Have I thanked you lately for providing such a wonder place to meet, share ideas, and just have some fun? Thanks

 

 

I will answer the second question first: yes and no.

 

Tom Williams talks about high volume bars with narrow spreads (ranges). The question is why is the spread narrow? If the volume is high, but the spread is narrow, then the market makers, who can see both sides of the market, must be keeping the spread low for a reason. In the case of a rising market, they must be becoming BEARISH. If they were bullish then the spread would be wide. They would be charging new traders to get aboard the bull. But as narrow spread implies they see large blocks of SUPPLY above the market and thus are looking for prices to fall. In this case the are more than willing to give the herd what appears to be a good price-narrow spread.

 

Now, what we have just described is a situation where the range of the bar is narrower than the previous bar and the volume is high to ultra high. Bill Williams' short hand definition of a squat is a bar with a narrower range than the previous bar and more volume. So, while Tom does not mention the term squat specifically, he talks about the concept.

 

The actual definition of a squat is a bar with increasing volume and decreasing MFI. However, the short hand definition does the job. According to Bill, all trends will end in a squat as the high/low bar plus or minus one bar of the same time period. Of course, NOT ALL SQUATS ARE CREATED EQUAL.

That were VSA takes the lead. VSA tells us to look for high or ultra high volume with the squat.

 

Bill says, "The squat it the last battle of the bears and the bulls, with lots of buying and selling but little price movement. There is an almost equal division between the number and enthusiasm of both the bears and the bulls.........." Trading Chaos, P.93

 

He is right on squats but wrong on concept. The most import group, the Smart money is decidedly bullish or bearish and the little guys are in the opposite camp. The spread is narrow not because the battle is evenly waged. It is narrow because it is not.