[VSA] Volume Spread Analysis Part I

[BlowFish 10]

  PivotProfiler said:

Thanks ezduzzit.

 

Simply, the most cost effective way to learn is:

 

1. The Book ($100.00)

2. The bootcamp ($500.00)

3. Screen time

4. Webinars (free)- every now and then Gavin does provide useful pieces of information.

5. Screen time

6. Repeat

 

 

PP my question is about 2. Does it really add anything that is not in the book? I have no issue splurging $500 but to be honest the book (especially the MM one over the paper one) seems pretty much complete from a point of view of analysis.

 

What does the boot camp have that the book dosen't? Does it talk about actual trading (as oposed to analysis)? One nuance or subtlty learn't makes it worthwhile but I am a bit sceptical.

 

Without being disrespectful not sure about 4. Seems mainly a mechanism to sell the software.I understand that Todd was a trader but Gavin was an entrepeneur (outside the business) that bought into Tradeguider with a view to marketing it better. Again without being disrespectful it shows in his presentations.

 

Repeating 5 seems the most value (with a re read of 1 now and then).

 

Cheers.

[coyotte 10]

Browsed this thread , but haven't come across this query.

 

Have read "Master the Markets" but is TradeGuider worth the loot ?.

seems to me just eyeballing will do the same job

[momentom 10]

I received an email from TradeGuider offering a free download of Tom Williams book.

 

I took them up on it even though I have the hard copy. I needed to authenticate with the emal address they sent the offer to.

[Anonymous 11]

  coyotte said:

Browsed this thread , but haven't come across this query.

 

Have read "Master the Markets" but is TradeGuider worth the loot ?.

seems to me just eyeballing will do the same job

 

In a word, NO.

[Anonymous 11]

  BlowFish said:

PP my question is about 2. Does it really add anything that is not in the book? I have no issue splurging $500 but to be honest the book (especially the MM one over the paper one) seems pretty much complete from a point of view of analysis.

 

What does the boot camp have that the book dosen't? Does it talk about actual trading (as oposed to analysis)? One nuance or subtlty learn't makes it worthwhile but I am a bit sceptical.

 

Without being disrespectful not sure about 4. Seems mainly a mechanism to sell the software.I understand that Todd was a trader but Gavin was an entrepeneur (outside the business) that bought into Tradeguider with a view to marketing it better. Again without being disrespectful it shows in his presentations.

 

Repeating 5 seems the most value (with a re read of 1 now and then).

 

Cheers.

 

 

Todd recently called the webinars by Gavin "Sales Presentations" and his webinars to customers "Educational learning.."". I think that says it all. And is one of my primary reasons for being so disappointed with TG.

 

There was a time when a person could learn a lot of information from the free webinars held by Todd. Which was also the reason, so many software customers would attend. Now, however, Gavin is trying to hock software to the masses. He talks the "talk" about trading from price and volume and the perils of indicator trading, then proceeds to use indicators himself ( trading systems are indicators). He waits for the VSA signs and bars to change color before making trades. Simply, that is not reading a chart.

 

TG is a software product. But there is a viable method to reading the charts at its core. This method, Volume Spread Analysis, is all worth using and need not be tied up with the product itself.

 

As for the bootcamp, see above. Todd, one of the world's recognized leaders in VSA and Tom Williams, the creator of VSA, made the bootcamp. Could there be a better source to gleam some nuances? It brings some of the concepts of the book to life.

[BlowFish 10]

  PivotProfiler said:

 

As for the bootcamp, see above. Todd, one of the world's recognized leaders in VSA and Tom Williams, the creator of VSA, made the bootcamp. Could there be a better source to gleam some nuances? It brings some of the concepts of the book to life.

 

Well I guess I am sold then I am also considering Joel's course. One of the reasons for my reticence is that my 'technical' skills are more than adequate to extract money from the markets. My problems are clearly 'emotional/psych'. In the past I have buried myself in bettering my technicals and deceived myself that I am trying to improve my trading.

 

I guess its like the CEO of a business putting all its resources into R&D when they need to improve there operations.

 

Could you expand a little where the boot camp goes that the book dosen't?

 

Cheers,

Nick.

[flatwallet 10]

Pivot...You Tina and Soul need to come out with a boot camp of your own. However, please do not price it at $500

 

Have any of you seen the boot camp videos and do you see it being worth while. It been a tough process for me to chage from current thinking to VSA thinking. I have incorporated the high volume and looking for stocks at the bottom of trends. However, the no demand, test and few other concepts elude me in real world practice. When I read the book, a light bulb constantly flashes over my head but once I put the book down, I feel the room getting darker and I start feeling lost. Are there any sources that don't rquire big bucks to start learning this stuff in more detail.

 

Thanks

[Anonymous 11]

  flatwallet said:

..... It been a tough process for me to chage from current thinking to VSA thinking. I have incorporated the high volume and looking for stocks at the bottom of trends. However, the no demand, test and few other concepts elude me in real world practice....

 

 

Hi Flatwallet. Thanks for the kind words. Keep reading the book.

 

I just wanted to show something that might help.

 

Originally, I was going to post this pic in the WRB thread and make the following point.

 

Not all WRBs are created equal. While there may be many factors in what constitutes a significant WRB, the three main are:

 

* Size in relation to other WRBs

* Amount of volume

* If the WRB is the result of some news related event

 

NihabaAshi is the true WRB expert and may be able to enlighten us as to some of the more reasons that determine a WRB's significant.

 

As I know you are looking at VSA, don't let what I just said about WRBs confuse you. There are three factors that constitute significant bars in VSA as well:

 

* Size in relation to other wide spread bars

* Amount of volume

* If the wide spread bar is the result of some news related event

 

Now in the chart below we see numerous WRBs or wide to Ultra wide spread bars. However, they are all not equal.

 

Let's just focus on the very first one on the left hand side of the chart. We see an Ultra Wide Spread bar with Ultra High Volume that closes up from the previous bar. VSA teaches us that markets do not like Ultra Wide Spread or Wide Spread bars on high or Ultra high volume. Because they could hide selling (supply) within them. Although some times they are indeed strength. Which by the way, much time is spent on in the bootcamp. Because many people after hearing weakness (supply) comes in on up bars automatically assume all up bars are weak.

 

We know this bar had some selling (supply) once we see that the next bar is down. If all that volume was buying (demand) then the next bar could not be down.

 

What we often see next, if the market is strong, is either a No Supply or Test for supply bar. Here we see a test. This is a low volume test. Note that volume is less than the previous two bars. Note that the test makes a lower low than the previous bar and closes on its high. It hard for me to separate some things, so I must point out that this test bar is in body of the WRB. But from a pure VSA point, note that the test is within the range of the Ultra Wide Spread bar. SIMPLY, A LOW VOLUME SIGNAL WITHIN THE RANGE OF A PRVIOUSLY HIGH VOLUME BAR.

 

Many concepts in VSA are logical. Here we see some supply enter the market. The next thing we see is a test of supply. The Professional want to take prices up, but are making sure that the supply is out of the market. If there were sellers underneath, then there would be more volume. And if a large amount of supply had entered (more than the demand present) then price would go down on more volume.

 

The key(s) here are that the 'test' comes immediately after we see supply enter the market showing us market strength. Or, simply put, location and background information. An aggressive trader might enter once the test is "proven" on the next bar that closes higher than the close of the test. Shown here. The reason for the question mark is that not everyone would enter at this point. Some use multiple timeframes, some use price action patterns, and some even use indicators ( ).

 

To be sure, the market did indeed move up and a quick profit could have been made. In fact, one could still be long as of this pic and in profit using only one timeframe and that repeatable and reliable pattern.

 

Once you witness Ultra Wide or Wide Spread bars on High or Ultra High Volume, you want to then start looking for bars with low volume. This is where you find no supply, no demand, and some test bars. Sometimes there will be high volume tests or Upthrusts on high volume. An Upthrust is kind of like a high volume test but showing weakness rather than strength. That is, a high volume test will close on or near its high and an Upthrust closes on or near its low. Ideally a high volume test will make a lower low while the Upthrust will make a higher high.

 

There is a lot more here, but it is enough to say that every No Supply or No Selling Pressure sign in this pic is within the range of a significant Wide or Ultra Wide Spread bar. More precisely, within the body of a significant WRB.

Edited March 26, 2008 by mister ed
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[flatwallet 10]

Well I understand it a lot more clearly now. Thank you for that.

[mroalan 10]

yes excellent stuff pivot, i also find the WRBS easy enough to understand its the follow through that takes time,but like all things just keep looking and your charts which i have printed out and added my notes,or as the case, "your notes".as for $500 that would look remarkedly cheap from where i,m sat! and as you can see this thread is hit a lot,if i knew where you lived i,d come round and sit outside your door untill you let me in. only joking.

[Anonymous 11]

Narrow Spreads & High Volume (Squat):

 

" This is very simple to see. The public and others have rushed into the market, buying before they miss further price rises. The Professional Money has taken the opportunity to sell to them. This action will be reflected on your chart as a narrow spread with high volume on an up-day. If the bar closes on the high, this is an even weaker signal.........." Tom Williams, Master the Markets, P. 77.

 

Just wanted to show something a bit different.

 

A few caveats:

 

* As previously mentioned, Not a good idea to enter trades after 1300 and certainly not after 1400.

 

* The above is even more so the case on a Friday.

 

What I wanted to show here was the narrow range bar on high to Ultra high volume. Of course, this is the type of bar where WRB & Long Shadow Analysis skips over. VSA, however, does not.

 

Again, the over-arching concept remains the same. We would be looking to see some type of entry signal within the body of a significant WRB or Long Shadow. What happens here is after an effort to rise we see a No Demand bar. This bar closes on its high and has volume less than the previous two bars. The very next bar has a narrow range, closes on its high and has greater volume than the previous bar. THIS IS A SQUAT. The above quote tells us the importance of the close on the high with this type of narrow range high volume bar: Weakness.

 

So if we step back, we have just seen a No Demand bar. Which tells us the Smart Money is not yet interested in higher prices. The next bar we see has a compressed range on higher volume that closes on its high and closes equal to the previous bar.

 

"..So by simple observation of the spread of the bar, we can read the sentiment of the market-makers, the opinion of those who can see both sides of the market.", Master the Markets, P.28.

 

Some may note the No Demand signal a few bars earlier. This would be a good place to short if we were not in a naturally low volume period. More over, the reason this short could be considered is because of the Ultra High Volume seen as an effort to rise. Then the following No Demand/Squat sequence. Simply, volume as a whole increased during this time so while the time of day remains a reason not to enter, the lack of volume doesn't.

 

What is important here though is the idea of the narrow range bar (narrower than the previous bar) on high volume, which is higher than the previous bar. In other words, the squat; Bill Williams' term, not VSA's term.

Edited March 26, 2008 by mister ed
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[BlowFish 10]

Hi PP a Couple of observtions. There is a nice failed test on the bar before the one you have marked selling pressure.

 

I am a bit of a WRB sceptic (though understand why they 'work'). Maybe thats more apropriate in another thread. Anyway for me the key area is the area that was tested by the two dojis and failed (at the start of the chart). Price has now returned there to see if there is any demand. In my book WRB's are often the result of price being driven through areas of S/R (supply/demand). Theres a subtle difernece there though the results are often the same. identifying the underlying S/R area often gives a more focused range.

 

I was interested in the squat. In a 'pure Williams' respect, he wants to see climatic (ultra high) volume on narrow spread. He also stipulates it should be in new territory i.e. no resistance to the left. This makes them pretty rare. You obviously use a more liberal definition? I do also but still like to see a bit more volume than that.

 

Incidentaly I was thinking of starting another thread that dealt with VSA 'definitions' e.g. what constitutes 'ultra high volume' when is a test likely to be a failed test etc. Wonder if you might participate? I know you view things as much art as science but its good to have consistant definitions (especialy if starting out). On a similar subject how do you set your yellow lines? Do you prefer them to the bands that TG use? (I suggested those to Roy many moons ago). These would be good discussions for a definitions thread if here is not apropriate

 

Cheers.

 

Cheers.

Nick

[Anonymous 11]

  BlowFish said:

.... There is a nice failed test on the bar before the one you have marked selling pressure.

 

Very nice. I did not mention this bar. If you notice this is a LONG SHADOW with Ultra High Volume. Just re-read any post and you will see that Long Shadows are important also. So we actually have the set-up occurring in the shadow of a significant Long Shadow as well as a WRB.

 

  BlowFish said:

I am a bit of a WRB sceptic (though understand why they 'work'). Maybe thats more apropriate in another thread. Anyway for me the key area is the area that was tested by the two dojis and failed (at the start of the chart). Price has now returned there to see if there is any demand. In my book WRB's are often the result of price being driven through areas of S/R (supply/demand). Theres a subtle difernece there though the results are often the same. identifying the underlying S/R area often gives a more focused range.

 

First, see the WRB thread. WRB represent possible changes or shifts in supply and Demand. Your observation about them only underscores my point. In my opinion, there is no more focused area than a WRB. WRBs are market generated and therefore superior to a lot of other ways to generate S/R areas.

 

  BlowFish said:

I was interested in the squat. In a 'pure Williams' respect, he wants to see climatic (ultra high) volume on narrow spread. He also stipulates it should be in new territory i.e. no resistance to the left. This makes them pretty rare. You obviously use a more liberal definition? I do also but still like to see a bit more volume than that.

 

Technically, you are correct. If the squat appears in new high territory it is a "end of a rising market" signal. Yet any narrow range bar with volume greater than the previous bar still may have some significance, especially if it occurs in the body of a WRB.

 

The point is that the range of the bar is being kept small even as volume increases. If the Smart Money was interested in higher prices then the spread would NOT be narrow. The narrow range gives us insight into the actual perception of value by the market makers.

 

My definition is based on Bill Williams' short-hand definition: narrower range than the previous bar with higher volume. But I add that the volume should be greater than average (preferably, high or Ultra high). And in this case, we have a close at the high.

 

But a squat should not be taken in isolation. The background is important.

 

  BlowFish said:

Incidentaly I was thinking of starting another thread that dealt with VSA 'definitions' e.g. what constitutes 'ultra high volume' when is a test likely to be a failed test etc. Wonder if you might participate? I know you view things as much art as science but its good to have consistant definitions (especialy if starting out). On a similar subject how do you set your yellow lines? Do you prefer them to the bands that TG use? (I suggested those to Roy many moons ago). These would be good discussions for a definitions thread if here is not apropriate

 

I would place a 30 period simple moving average over volume. From that point one could place a 2 standard deviations average of that 30 period average on the chart. If volume is higher than 2 deviations, then it would be considered high. 3 standard deviation would be Ultra high. This is more along the lines of what is used by TG. However, one can just "eyeball" volume.

 

The yellow lines are more to "add" a bit of color than anything else.

 

Thank you so much for the post, please continue to post your thoughts. A few chart examples would also be nice.

[Gordon G. 10]

Hi PivotProfiler,

 

you have a PM

 

Best regards

[Anonymous 11]

Hello Ev1;

 

A while ago I stated that one of the ideas weaved throughout my posts was context. There is another concept that is also in many posts. This idea is VERY important. In fact, in my opinion, this idea is the key VSA concept.

 

The concept: Best entry/signals tend to be low volume signals that occur within the range of a previously high volume bar.

 

First, it should be noted that the attached chart was taken as the market was in a normally low volume period: the Sunday night opening period. It should also be noted that I have shown some Result on the chart and that means that the candles discussed do not appear to have the amount of volume they actually have. What that means is After the appearance of these candles with high and Ultra high volume, more candles were created with even higher volume. This gives the impression that the candles discussed have less volume. But keep in mind, we look at volume both relatively (relation to the previous bar or bars) and absolutely (actual size of the bar in question).

 

That said, let's see what we have here. Note that the very first candle highlighted is an inverted white candle with Ultra High Volume. This gives us a Long Shadow. Long Shadows signal changes or shifts in supply and demand and so too does Ultra High Volume. After the supply enters the market there is a No Supply sign a few candles later. Despite the supply that came in, the Professional Money is not yet interested in lower prices. Price thus moves back up where we see a narrow range bar with higher volume than the previous candle. This candle also is a Doji. Note that the close of the Doji is within the range of the Long Shadow. It closes at the high of the Long Shadow. But before we get to that point, we see a white WRB created with High to Ultra High volume.

 

Now here is the key. We see a No Demand candle, which happens to be a Doji, created within the range of the large dark WRB. But notice that this low volume signal has traversed back into the shadow of the Long Shadow inverted white hammer line and the white WRB. So we are seeing low volume in previously high volume area. If any of that volume represented buying that buying pressure is no longer present.

 

Simply, looking at where the volume was once high and now seeing little volume is a clue that the supply/demand dynamics have certainly changed.

Edited March 26, 2008 by mister ed
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[flatwallet 10]

Pivot,

 

Could a No Demand bar be viewed as a bar that foreshadows a continuation pattern?

 

Also, when we talk about excessive volume, are we just talking about volume relative to the past few bars or are we trying to say that it is 2, 3 or 4 times the average volume (intraday)? And if so, how would we measure the average volume? Would the average of past 50 bars be good enough?

 

I know it's a lot of questions but I'm just trying to get my arms around all the concepts. It so good to be part of this board as there aren't too many sites out there that can explain this stuff. Plus, there aren't as many knowledgeable people on those sites that are helpful.

 

Thank you berry berry much

[Anonymous 11]

Very interesting chart here.

 

I makes these posts to help me learn as much as anybody else. I am really starting to see the relationship between High/Ultra High Volume areas and subsequent Low Volume signs within that area. If I had any doubt about the importance of volume, I certainly don't now.

 

Many of the charts are repetitive but there are two main reasons for that:

 

1. Theses things repeat day after day and on all timeframes.

 

2. Pattern recognition.

 

At any rate, here is a really cool chart with much of the same AND a new twist.

 

First, we see a down dark candle line on Ultra High Volume. But the next bar is up. Therefore there must of been some demand (buying) on that dark candle line. That next up bar, in fact, has even more volume and closes off its highs. We know that the market does not like wide spread candles on High or Ultra High Volume. At this point, we also have a white (close>open) WRB. Thus by extension, we have a Support/Resistance zone. Remember, WRBs represent changes or shifts in the supply/demand dynamics in the market.

 

The bar following this WRB is up, but the volume is less than the previous two candles and the range has narrowed. The candle following the No Demand is down. Now we can see that the WRB did indeed have some supply in it. (while this is after the fact, if we step back and look at what price did following the WRB is move sideways. Which means there must of been supply entering on the WRB. But this after the fact notion only confirms what we see during the fact.)

 

Note that the bar following the No Demand is itself a No Supply bar. The volume is less than the previous two candles with price closing lower than the previous bar. On the very next candle we see a test. This test, however, is not a low volume test but rather a higher volume test. As usual, we look for the confirmation of the test to come one to two bars later. Here it does indeed come on the next bar. But this next bar is also a No Demand bar. It has a smaller range, closes higher, and has volume less than the previous two candles. At this point I would depart from VSA just to note that this is not a High Close Doji as the close is equal to the high of the doji, not higher.

 

Before going into this bar a bit more from a VSA perspective, let's jump ahead two more candles. We see a narrow bar that makes a lower low, closes in its upper portion on lower volume This is a test. KEY THINGS:

 

1. This second test has a narrower range than the first test.

 

2. This second test has less volume than the first test.

 

3. This second test does not make a lower low than the first test.

 

4. This second test comes within the range of a high volume candle, more specifically, within the body of the High Volume white WRB.

 

This second test is confirmed the next candle by a bar that closes higher than the close of the test bar itself. NOW WE HAVE A HIGH CLOSE DOJI, as the close is also higher than the high of the doji test candle. Note that the volume is higher than the test candle. In fact, the volume is very high on a wide spread. But this time we have PUSHING THRU SUPPLY (a sign of strength).

 

The difference in the two confirmation candles after the respective test candles; Activity. Professional Money was more active on the second as evidenced by more volume than on the first.

Edited March 26, 2008 by mister ed
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[Anonymous 11]

  flatwallet said:

Pivot,

 

Could a No Demand bar be viewed as a bar that foreshadows a continuation pattern?

 

This is a very tricky question. The short answer would be yes, however. What you need to keep in mind is the most basic definition of No Demand/No Supply. A bar/candle with volume less than the previous two bars/candles closing up (or equal) from the previous bar/candle for No Demand. And closing down or equal for No Supply.

 

Using the base definition, many bars/candles fall into the category. This is one reason I look for those that fall within the body of a WRB or shadow of a Long Shadow.

 

Also note that this is why TG only paints No Demand/No Supply on certain bars. The ones where the next bar confirms a No Demand, for example, by closing down. Yet, when Todd speaks of a bar, he will call it No Demand as soon as it closes.

 

Joel Pozen paints almost every low volume bar (volume less than the previous two). These are the only VSA signs on his charts, but even still the chart can get cluttered with them. Many times a No Demand will paint but the next bar will be up. This does not change the fact that the bar was No Demand from a base definition point of view, but it does create multiple signs and belies the really important ones.

 

But back to your question, they are going to show up in both reversal and continuation situations. Location and context determine which.

 

  flatwallet said:

Also, when we talk about excessive volume, are we just talking about volume relative to the past few bars or are we trying to say that it is 2, 3 or 4 times the average volume (intraday)? And if so, how would we measure the average volume? Would the average of past 50 bars be good enough?

 

Both. We look at volume in relation to the previous 1,2 or 3 bars. We also look at an individual volume histogram in relation to all previous bar on the chart that can be seen at the time.

 

We also look at the individual volume histogram by itself. Here we are looking at actual size (amount does not matter). A 30 period moving average can be used to determine if volume is greater than average or less than average. If you put a 2.0 standard deviation of that 30 average on the chart as well, then you could call all volume histogram bars greater than that line high. You could also place a 3.0 standard deviation of the average on the chart and call all volume histogram bars greater than that Ultra High Volume. This is basically what TG does.

 

Now, a volume histogram bar can be both Ultra High (greater than the 3 standard deviation line) and Low Volume (less than the previous two volume histogram bars).

[flatwallet 10]

Thank you so much for yet another free lesson. I have programmed my TradeStation Strategy to calculate the 50 period volume moving average (5 min charts) and set a 1 bar trailing stop when volume exceeds 3 times this average. I can't tell you how much money it has saved me. I wish I knew how to find a way to exit the trade immediately rather than trail it by one bar. But that's a different story. Thank you.

[Anonymous 11]

Something different.

 

I was going to post something but changed my mind. Instead, I would like to hear from some of you. Where would you enter (if at all ) and why?

Edited March 26, 2008 by mister ed
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[Gordon G. 10]

Hi PivotProfiler,

 

if you mean "where would you have entered", I would reply at the close of the black candle following the 1st No Demand bar.

However my stop would probably have been hit and I would have closed my position with a loss.

 

Best regards.

[flatwallet 10]

Pivot,

 

I would have entred during the black candle but at the lows of the first No Demand bar - .01. My stop wouldn't have been hit beacuse I usually place my stops at the highs/lows of a 5 channel. That being said, I would consider myself lucky.

 

flatwallet

[Anonymous 11]

  flatwallet said:

Pivot,

 

I would have entred during the black candle but at the lows of the first No Demand bar - .01. My stop wouldn't have been hit beacuse I usually place my stops at the highs/lows of a 5 channel. That being said, I would consider myself lucky.

 

flatwallet

 

Nice. Thank You for the reply. Please post some charts with examples, we can all benefit from your knowledge.

 

  Gordon G. said:

Hi PivotProfiler,

 

if you mean "where would you have entered", I would reply at the close of the black candle following the 1st No Demand bar.

However my stop would probably have been hit and I would have closed my position with a loss.

 

Best regards.

 

First, Hello GG. I am glad you joined me here. You seem to be making good progress. Keep posting.

 

 

***********

 

From a pure VSA point of view the ideal entry is when the No Demand is confirmed. We have a lot of weakness behind us in the form of a failed test and supply entering on up bars with high volume. For me, however, I like the No Demand within the two support/resistance zones: the WRB and the Long Shadow. For some it is a bit late, but note that here a stop just above the No Demand would never be in jeopardy. Moreover, here we are actually using the low volume sign that appears in the range of high volume candles.

[Anonymous 11]

No Result from a Test

 

"No immediate results from a previous test can show weakness is present in a bear market. However, you should remain observant for a second test in a strong market. If you can see a what appears to be a successful test, the market makers, or specialists will also have seen the indication. If there is not an immediate up-move, or the up-move fails over several days (or bars, if on a shorter timeframe), this now becomes a sign of weakness. The professional money has not responded because at that moment they are still bearish.", Master the Markets, Tom Williams, P. 155.

 

A while ago myself and BrownsFan got into a discussion about "knowing when you are wrong, or at least early into a trade". He argued that he does not know he is wrong until his stop is hit. My point at the time was that one can see if he is wrong, or wrong on timing, prior to the stop being hit. Therefore, like the POP said, there is no need to wait for the stop to be hit. Don't wait for the market to prove you wrong, look for it to prove you right.

 

What neither of us mentioned was something NihabaAshi is a proponent of: a Contingency plan. Basically, a contingency plan is a price action pattern used to tell you something has changed and the prior signal is no longer valid. Once this pattern appears, a long is reversed into a short. Note this is different than a simple stop and reverse procedure as it is possible for the contingency plan to be triggered before one's initial stop is hit.

 

If you are interested in contingency plans, NihabaAshi is the one to talk to.

 

What this chart shows is based on the concept however.

 

First we see a good test. The volume is not low, but it is not high either. It is confirmed on the next bar with a close up. This is where you go Long. My stop would be just under the low of the test bar.

 

Note what happens next. price moves down and a dark WRB is formed. From that point, another test candle appears. On this test, the volume is lower than the first test, and the candle is at the same range of the first test. Again, this test is confirmed on the next bar. Two bars later, we see a No Demand sign. Not a good sign for the longs.

 

This No Demand is completely within the bodies of Two WRBs (hint).

 

But the bar that confirms the no demand sign is key. It is another large dark WRB. What is most important is that this candle (Dark WRB) closes below both test candles' lows. A dark WRB closing below the low of the test candle should trigger a trader to at least re-evaluate the long position. Note here that it would have stopped many traders out, but not all.

 

With the appearance of a No Demand and a dark WRB that closes lower than the low(s) of the test candle(s), we have no doubt that we are seeing No Result from a Test. Our contingency plan would thus be triggered and a short is placed on the next bar. Again, understand, these are not failed tests, they are good test with no results. Simply, we have negative action.

 

Negative Action: "If you observe a positive indication, but you do not observe the expected results, then we refer to this as 'negative action'...." P. 152

Edited March 26, 2008 by mister ed
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[flatwallet 10]

How would you read the following chart?