[VSA] Volume Spread Analysis Part I

[torero 10]

PP, quick question. What tick charts do you use for viewing the trend and what tick chart for entering trades? Thanks.

[BlowFish 10]

Here are are a couple of charts of the DAX that I have wanted to post for a while. There is a 3 minute and a 10 minute to give a couple of perspectives of the action.

 

One of the two remaining questions I find I ask myself asking frequently is "was that enough volume to stop the move (rather than just pause it)". The charts show the last two legs of a down move. To me they look very similar.

 

You have a down move with high volume and then a test of that area over two bars (point 1) on diminished volume. The only small clue is at point 2. Apart from that one bar before the final drop I would say the first 'bottom' looked weakest to me!

 

I'd really welcome comments as it seems the differences between the two are really subtle. Of course if we could read supply and demand with crystal clarity on every occasion then we would never have losing trades. I believe this is impossible so it is probably safe to say that it is not possible to read supply and demand with crystal clarity on every occasion!!

 

I've left the charts fairly 'bare' in case people wanted to draw on them.

 

Cheers.

[Anonymous 11]

PP, quick question. What tick charts do you use for viewing the trend and what tick chart for entering trades? Thanks.

 

15min chart for trend

 

5min chart for trades

[Anonymous 11]

Blowfish;

 

Thank you for the charts, please keep them comming. I am sure somebody here will be able to make a comment soon.

[Tasuki 10]

Blowfish,

Not exactly sure what you're asking. Could you rephrase please? From what little I know, these look like pretty classic signs of weakness. Beyond that, I'm not sure what the question was.

As an aside, I'm puzzled by the coloring of the volume bars.Ok, maybe I've got it now---if the volume is higher than the previous bar, it gets painted green, if volume is lower, it gets painted red. Have I got that right? My eyes want to tell me that green volume bars accompany a higher close in price, but that's obviously not what's going on in those charts.

Taz

[Anonymous 11]

Blowfish,............. I'm puzzled by the coloring of the volume bars.Ok, maybe I've got it now---if the volume is higher than the previous bar, it gets painted green, if volume is lower, it gets painted red. Have I got that right? My eyes want to tell me that green volume bars accompany a higher close in price, but that's obviously not what's going on in those charts.

Taz

 

You are correct. You also bring up a fatal error that most traders make. They paint volume green (or blue) when the close is higher than the open and paint volume red when the close is lower than the open. OR they paint the volume green when the close is higher than yesterday's close and red when the close is lower than yesterday’s close.

 

Weakness comes in on up bars and Strength comes in on down bars. An up bar being defined as a closer higher than the previous close and a down bar being defined as a close lower than the previous close. Hence, the green, which connotes buying, is erroneous and misleading.

 

As far as close above the open, Volume Spread Analysis does not look at the open so this would technically be mute. I do look at the open, yet I paint volume as BlowFish does: higher volume is blue, volume less than the previous volume is red.

 

Now we can look at a basic volume concept:

 

BULLISH VOLUME IS INCREASING VOLUME ON UP BARS & DECREASING VOLUME ON DOWN BARS.

 

BEARISH VOLUME IS INCREASING VOLUME ON DOWN BARS & DECREASING VOLUME ON UP BARS.

 

Of course that volume can not be excessive as it may mean hidden buying or selling depending on the bar in question.

[BlowFish 10]

Blowfish;

 

Thank you for the charts, please keep them comming. I am sure somebody here will be able to make a comment soon.

 

 

I was hoping you might being the resident VSA guru

[BlowFish 10]

OK first off best to ignore the dots over the bar. If you notice there can be potentially two sets of dots over the bar. Which position which end and what colour have significance. The green dots are nothing to do with volume but spread and close! Blue dots are low volume cyan dots are ultra low volume but there position has significance too!

 

Anyway please ignore them for now as they are a work in progress.

 

The question still stands and it seams to show VSA 'not working this time'. The pattern of bars, volume, spread etc. is almost identical on the last two pushes down. One results in another leg down one results in turn.

 

Both have a climax bar with close up (buyers entering). Both have a test a few bars later. This is a sign of strength not weakness. One results in the downtrend ending one does not. On the 10 minute chart I have a simple tick and cross on the test bar which would be a classic go long. On the 3 minute chart I have drawn a yellow horizontal line segment under the two groups of bars.

 

Let me be clear I am a staunch proponent of VSA but having studied it long and hard (since Williams first edition) I still find this is one of two areas where things are subtle and different.

 

Cheers

[Anonymous 11]

Obviously, this is hindsight.

 

The first thing that catches my eye is the Wide Spread Bar that is the first bar in the shaded area. I do not know where the bar opened, but my feeling is that this is a WRB. Even without that knowledge, one must see that this is the largest bar on the chart shown. The volume is also very high. It is higher than the red line which I assume means it is a certain deviation above average volume. The next bar is up. Clearly there must be Buying (demand) within that first wide spread bar. The appearance of this widespread bar is an immediate differing point from the first "bottom".

 

The next bar is down and a Selling bar (positional relationship) on volume less than the previous two bars: It is No Supply. Now we move to the next bar with a purple arrow and it is No Demand. If that wide spread bar also represented an effort to fall, this would be bearish. It would mean those who were trying to push the market down are not "racing to cover". It would also indicate that there is not a rush of new Bulls into the market. However, on the very next bar, two bars to be exact, we see less volume on bars that are closing near the high. These are tests.

 

We have seen stopping volume (the wide spread bar on high volume with the next bar down.) We saw a No Supply sign right after that, and now we are testing for supply on lower and lower volume. In short, there are reasons in the background to take the test bars as signals to get long. I would mention the location of the test bars: low volume bars within the Possible body of that possible WRB.

 

If you add in the higher timeframe, the only time one would be looking to go long is at this "second bottom"-your term.

 

In sum, the situations are, in my opinion, very distinct. And that distinction starts with a WIDE SPREAD DOWN BAR on HIGH to ULTRA HIGH VOLUME.

Edited March 28, 2008 by mister ed
Add back chart

[BlowFish 10]

Re annotated 10 minute chart with comments in the image. Second (and real low) seems to have more weakness in that the first one? This general pattern is really typical of 'stair step' trends. The test or volume dry up bar make fantastic continuation entries in a trending (stair step) market.

 

P.S.

 

PP missed your longer reply getting to that now. Hindsight is fine (that's contentious) but we have to be extra brutally honest and if there is any doubt or 'fuzziness' assume the worse. Imo it is then pretty valuable. With that in mind I always assume the reverse of what I am trying to prove. Works well for me.

[Anonymous 11]

You need to look at the book again. Your #1's are wrong. They are not weakness.

 

I only see one test: the second #4. Note that it closes closer to its high and closes down from the previous bar (the ideal test bar closes on its high and closes down from the previous bar, has a narrower range and volume less than the previous two bars).

 

That is NOT a good place to see an Upthrust (#5). It is like seeing a polar bear in Africa. That bar is in fact more bullish than a bearish Upthrust would be.

 

Please keep posting charts. I can be wrong here and do not take offense.

[BlowFish 10]

The number #1's are strength that was a mis-annotation I had to do it all again as paint messed it up (OK I messed up -an aside can anyone recomend a good simple annotation proggy?).

 

I could argue (but won't) that the first 4 is a test it's certainly not a great one - price has moved down into the area of the high volume bar and gone back up. It was on increasing volume though it was much lower relatively.

 

Bar 5 'upthrust' is testing that exact same area the first 4 was but from the other side. The predominant trend is still down and we would expect the market to test upwards before carrying on down. Price does come off for a couple of bars anyway. As an aside notice the dotted blue line at that exact price...that'll be R1/S1/R2/S2 or some such.

 

The reason I am hammering this (pardon the pun) is not to be argumentative but to try to improve my understanding. As I said earlier I think one of the key things is gauging whether clearly observable demand entering the market is 'enough' to overcome supply and whether it overcomes it with enough force to terminate the trend (rather than just pause it).

 

Thanks again PP for your insights.

[Anonymous 11]

...........Bar 5 'upthrust' is testing that exact same area the first 4 was but from the other side. The predominant trend is still down and we would expect the market to test upwards before carrying on down. Price does come off for a couple of bars anyway. As an aside notice the dotted blue line at that exact price...that'll be R1/S1/R2/S2 or some such.

 

 

"Up-thrusts can be recognized as a wide spread up during the day (or during any timeframe), accompanied by high volume, to then close on the low. Up-thrusts are usually seen after a rise in the market, where the market has now become overbought and there is weakness in the background. Up-thrusts are frequently seen after periods of selling, just before a down move. Note the day must close on or very near the lows; volume can be either low (No Demand) or high (supply overcoming the demand)...", Tom Williams, Master The Markets, P. 78.

 

Simply, the background is not conducive to calling that an UpThrust. Yet, even if one does consider it an UpThrust, it is not enough in and of itself to cause a short trade. And the points you make about the area being the same as the first #4 and a pivot area are worth noting.

 

From my point of view, It all goes back to the wide spread bar. We know that demand entered on that bar. Ultimately, we get a test within the range of this bar. The Upthrust, is not contained within the range of the wide spread bar (#1).

[BlowFish 10]

The second type of action described under that description (low volume) is quite different to the first (high volume). I think its very important to distinguish what's going in each case. Actually I would not normally refer to them as 'upthrusts' the latter (low volume) ones I would call a test despite being upwards.

 

The first essentially shows that sellers have entered the market in strength. You would normally see this after a solid rise. The second shows that the buyers have withdrawn from the market. You can see this after an up move but it is far more common at the end of a small correction or testing an area where demand had previously appeared to the left. They are quite different in characteristic and will be seen in quite different contexts usually. This is one of the areas where the book could really be clearer imo.

 

If you look at the 10 min chart every stair step down (including the one before the two we have been discussing) has its end marked by bars similar to this second type of bar. (though slightly lower closes differentiate them). They do open low go up and close low however. If you watch it in real time it is even more clear you can see the buyers just disappear.

 

Actually there is a much broader principle at play here 'stuff' can happen broadly in one of two ways buyers withdrawing or sellers entering. The former tends to happen in corrective moves. This was one of the early things that I had difficulty with in the early days when the book had just been published. I scratched my head thinking why can this occur on high volume or low volume until it occurred to me that it was distinctly different behaviour.

 

Hope I am not being a pain....I feel there is still useful stuff coming out of this Its helping me anyway.

 

Cheers.

[BlowFish 10]

P.S. While we are talking about this minutiae I haven't lost sight of your main comment about the WRB being the big clue.

[habi 10]

Hello

 

I have done a look on the Diamond's weekly chart. Since beginn of Mai we have a significant ascent in volume, comparable with the volume seen on July/Oct. 02. It looks to me, that we have seen a lot of selling from the smart money and a major top could be under way.

 

On the other side, the last two candles have ultra high volume. The first candle formed a WRB, the second one with even higher volume has a small body with a long upper shadow, closing at the same level as the candle bevor. Because it closed not lower, there must be some buying last week and we can hope for a reaction soon.

 

I hope for some comments, thanks.

[Anonymous 11]

................The question still stands and it seams to show VSA 'not working this time'. The pattern of bars, volume, spread etc. is almost identical on the last two pushes down. One results in another leg down one results in turn.

 

Both have a climax bar with close up (buyers entering). Both have a test a few bars later. This is a sign of strength not weakness. One results in the downtrend ending one does not......

 

 

Thanks BlowFish for your posts, you got thinking of some real important issues. Trying to catch tops and bottoms is NOT the best way to trade with or without Volume Spread Aanalysis. Trying to get in on the bottom with VSA is no different than trying to get in on the bottom with CCI. Sure, VSA is better in that it tells more of the truth about what is going on, but it is still predictive and not surrendering to the market.

 

If the trend is down, then one should be looking to trade from the short side.

 

Prior to a real sustainable change in trend there is usually an Accumulation or Distribution phase (this is key). This means many of the best moves come AFTER a sideways period and not a "V" shape hard down, hard back up.

 

Check out the chart on the left:

 

It was clear that the trend was down on the day. Why fight that?

 

The market gives us a Dark WRB followed by a No Supply bar. A few bars later, we get a Valid Test. Taken together this is a time to get long. More precisely, taken in isolation, this is a time to get long. Isolation because it ignores: multiple timeframes, current trend (a trend in motion tends to stay in motion), lack of any accumulation phased needed to make a sustainable rise possible.

 

Now, suppose one went long. As previously mentioned, a contingency plan should be in place. Once there is a Dark WRB that closes below the low of the Test bar, it is time to reverse position and get short. At that point we see Negative Action or No Result from a Test. This is weakness. True that the No Supply is strength and the Test is strength, but what results from their existence proves to be weakness.

 

If one was trying to surrender to the market, one would not be looking to get long in the first place. Now the No Result from a Test/Negative Action is actually a Signal to get short. I used to call Walter (and other indicator traders) the short bus-squigglely line crew . Now I am one of them. The Balance of Power Line was signaling bullish control as the PRICE ACTION SET- UP was appearing. While the indicator is NOT used to signal a trade, it is used to nullify a Price Action signal.

 

There is no need to worry how much volume is needed to change the trend-create a bottom or top. Tops and bottoms can pick themselves.

 

The chart on the right.

 

This chart shows two more great short Price Action Set-ups. We get our WRB and then a VSA sign within the body of the WRB. In both cases the No Demand comes when the Bears our in power (red). Multiple timeframes can help us know that the trend is down. Traditional use of indicators probably would have none looking for an "oversold" signal and a way to get long.......

 

Note that there is a Price Action Long Set-up in-between the two shorts. Good in isolation, but we don't trade in isolation. The Balance of Power favors the bears. More importantly, once we get that Dark WRB that closes below the low of the test bar, we know we have Negative Action/No Results from a Test. In other words, weakness.

 

Once again, thanks BF and TG for the help/ inspiration. This is why an interactive thread is so important. As this is not one, this is likely my last post.

Edited March 28, 2008 by mister ed
Add back chart

[BlowFish 10]

Thanks for your continued observations on this. I have always be prone to trying to catch the high tick/low tick. This is a psych issue (ego) rather than anything technical! I'll give your charts and post some more thought later.

 

As an aside is your BoP elders, or is it more like Tradeguiders 'presure gauge'?

 

Thanks again.

[Anonymous 11]

Well, my post did not generate the controversy I had hoped (I lost that bet). I have no real intention of joining the short bus squigglely line crew.

 

BF: PM me and we can continue our shared journey. This thread is pissing me off.

 

Thanks for your continued observations on this. I have always be prone to trying to catch the high tick/low tick. This is a psych issue (ego) rather than anything technical! I'll give your charts and post some more thought later....

 

I don't know about the high/low tick, but being able to see stopping volume helps. Note that there is a Long Shadow formed by the Stopping volume bar, and that the mid point of that shadow acts as a support level with in the larger support/resistance zone formed by the entire shadow.

 

On top is where my questions are: Why is the No Demand within the Long Shadow a better trade than the No Supply within the Range of the WRB body?

Edited March 28, 2008 by mister ed
Add back chart

[stock 10]

Hi PP, I'm looking to learn and just came across this forum a few days ago.

Would hate to see this thread die just when I've found it, so I'll ofer an answer to your last question.

 

Just as "smart money" usually looks to sell into up days (bars) and buy into down days, prices rise looking for supply and fall looking for demand. So a no demand bar towards the top of a range and a no supply bar towards the bottom would be more significant than the other way round. ie your no supply bar in question is towards the top of the range.

 

At this stage of my learning curve, I have difficulty identifying your first no supply bar as such. To me it could just as easily be people not being prepared to pay the opening price level so volume and price fall away ie no demand. The spike and tail are just about equal and fairly small.

[Anonymous 11]

............At this stage of my learning curve, I have difficulty identifying your first no supply bar as such. To me it could just as easily be people not being prepared to pay the opening price level so volume and price fall away ie no demand. The spike and tail are just about equal and fairly small.

 

First, thank you for your post.

 

As you are new I do not want to confuse you. However, I pay particular attention to Buying and Selling bars. Buying/Selling bars refers to a positional relationship and NOT an assessment of who was in charge for that bar. That is, a Selling bar is a bar that makes a lower low than the previous bar but not a higher high.

 

What you have is a bar/candle where the low is not being supported but the high is acting as resistance. Many people would say that the bears must be in charge of the period. Note also that the close is lower than the open and lower than the previous day. All these things belie the fact that the bar is more strong than weak as there is little volume on the bar.

 

In VSA terms, the Smart Money is not interested in lower prices at that time. Hence it is No Supply. There are many traders (in the herd) that call such a bar a Selling bar and think it signals weakness. This is how the Smart Money likes it. Without volume, the truth is not so opaque.

[BlowFish 10]

Hi PP,

 

I too think it would be a great shame if this thread died. When I finally found my way here it was the main thing that captivated me. Since making it my premier site for trading talk I have I have discovered there are other fine traders hanging out here but I probably would not stayed long enough to find out if it wasn't for this thread. I have you to thank for this and the other participants here have you to blame heheh! Actually I prefer the thread a little slower, the signal to noise ratio is far higher then!

 

I mentioned a few posts back that there where two things I sometimes had trouble identifying. We talked about the first (identifying if enough supply/demand has entered to really halt a trend).

 

What has just been raised here is actually close to my second area for improved observation understanding. The earliest possible identification of the anticipated exit direction of a congestion. Put another way is accumulation or distribution predominant in a range. I saved the more important question for last.

 

Cheers.

 

P.S. feel free to PM me about the BoP

[mister ed 10]

Thanks PivotProfiler and all contributors to this thread, great learning tool. Pivot, a few pages back you put up some code for assessing supply and demand. I have some code I use to help assess "effort" and "result", in the Wyckoff sense. Its very simple code, and could probably do with some refining, but might provide a helpful starting point for some.

 

-----------

W 1. Up bar

C>Ref(C,-1) {I told you it was very simple...}

 

W 2. Down bar

C<=Ref(C,-1)

 

W 3. Higher volume

V>=Ref(V,-1)

 

W 4. Lower volume

V<Ref(V,-1)

 

W 5. Wider spread

(H-L)>Ref((H-L),-1)

 

W 6. Narrow spread

(H-L)<=Ref((H-L),-1)

 

W 7. Close upper half

(C>=((H-L)*.5)+L)

 

W 8. Close lower half

(C<((H-L)*.5)+L)

 

W 9 Vol > MA

V>Mov(V,60,S)

 

W 10 Vol < MA

V<Mov(V,60,S)

 

W 11 Wide spread

(H-L)>Mov((H-L),60,S)

 

W 12 Narrow spread

(H-L)<Mov((H-L),60,S)

 

W 13 Vol down 2 days

{plots a minus 1 if volume has fallen for two consecutive days}

If(

V<Ref(V,-1)

AND

V<Ref(V,-2)

AND

Ref(V,-1)<Ref(V,-2),

-1,0)

 

 

W Effort

Fml( "W 3. Higher volume") +

Fml( "W 9 Vol > MA");

 

 

 

W Result

If( Fml( "W 1. Up bar") =1,1,0)

+

If( Fml( "W 2. Down bar") =1,-1,0)

+

If( Fml( "W 5. Wider spread") =1,1,0)

+

If( Fml( "W 6. Narrow spread") =1,-1,0)

+

If( Fml( "W 7. Close upper half") =1,1,0)

+

If( Fml( "W 8. Close lower half") =1,-1,0)

 

 

 

W Result(2)

If( Fml( "W 1. Up bar") =1,1,0)

+

If( Fml( "W 2. Down bar") =1,-1,0)

+

If( Fml( "W 5. Wider spread") =1,1,0)

+

If( Fml( "W 11 Wide spread") =1,1,0)

+

If( Fml( "W 6. Narrow spread") =1,-1,0)

+

If( Fml( "W 12 Narrow spread") =1,-1,0)

+

If( Fml( "W 7. Close upper half") =1,1,0)

+

If( Fml( "W 8. Close lower half") =1,-1,0)

 

 

 

 

W effort result combined

 

{Multiplies an “up†“result†by the “effortâ€Â: that is, if the result is up, as measured by the “W Result†equation the result is positive, it is multiplied by the effort, as measured by the “W effort†equation.}

 

(If( Fml( "W Result") >0,Fml( "W Result"),0))

*

Fml( "W Effort")

 

 

 

 

W effort result combined(2)

 

{Multiplies a “down†“result†by the “effortâ€Â: that is, if the result is down, as measured by the “W Result†equation being negative, it is multiplied by the effort, as measured by the “W effort†equation.}

 

(If( Fml( "W Result") <0,Fml( "W Result"),0))

*

Fml( "W Effort")

 

 

 

 

W effort result added

 

{adds the “up†effort result and the “down†effort result}

 

Fml( "W effort result combined") + Fml( "W effort result combined(2)")

 

---------

 

Some of these "indicators" I plot on a chart as a tool to help assess effort and result. They are not "indicators", though, just tools. I will try to upload a chart with the tools on it, just to show an example.

[mister ed 10]

[Anonymous 11]

Thank you for posting. Please keep them coming. I kid the short bus squigglely line crew, but the truth is when indicators are used correctly the can help clear the murky water. Especially if they are used to define the IS not the "should be".