[VSA] Volume Spread Analysis Part I

[Anonymous 11]

 

Do you have a rule of thumb where when a market makes a new low, you prefer to wait for a potential test in the next x bars? Like sometimes a test will come on the second bar after the new low or 3-5 bars afterwards by making a new low by 1-3 ticks before reversing.

 

Although most traders do not want to catch tops or bottoms, a good entry is absolutely key with the Nikkei due to the large tick size. Do VSA traders here wait until price breaks the high of the test bar?

 

I am not concerned with picking tops and bottoms; I let them pick themselves.

 

There is no "time limit" on when a Test can occur. What is more important, at least for me, is that the Test come within the body of a significant WRB. That is, within the range of a high volume candle. Sometimes you will see stopping volume (Ultra High Volume closing on or near the high on a wide spread candle), then you get a No Demand as price begins to move up. Now if price moves down an gives a Test, you really have something. The No demand indicated that the Professional money was not yet ready to take prices higher. They needed to see if there was any supply left in the market. Supply is resistance to higher prices. Hence, they Test the market. This entire process could take many bars or as few as three (Stopping volume, No Demand, Test). So there really is not set amount of bars one needs to wait for a Test.

 

As far as waiting for the next bar goes, one really does need to wait. A Test is really not a Test if the next bar or bar after that does not make a HIGHER close than the Test bar. One can use "multiple timeframe tricks" to get better entries. For example, if a 10 min chart shows a bar that appears to be a Test: volume less than previous two bars, close on the high, close down from previous bar and is within the range of a high volume bar, one could go up a timeframe or two looking for clues that demand has entered the market and the path of least resistance is likely up.

 

There was an example of this in reverse given by Todd himself. He saw a bar with volume less than the previous two, closing on its low and closing higher than the previous bar on a narrower spread: No Demand. However, the next bar had not completed (it was on a daily chart), but he used the knowledge of this bar to set up his bias for the next day. He looked to go short on signs of weakness on the 30 and 5 min charts. But now we are getting into trading technique.

 

Generally it is advised to wait for the next bar to confirm. If the NIKKEI is different because of tick size, I would at least suggest using a multiple timeframe approach.

[tawe trader 10]

Where I find VSA very worthwhile is in a situation where a lot of indicators fail, ie an intraday trading range. If the mkt is bouncing around without any major news you can quite successfully pick tops and bottoms.

 

Due to the very important remark PivotProfiler made - "I am not concerned with picking tops and bottoms; I let them pick themselves"

 

 

I need to re-write the above.........if the mkt is bouncing around without any major news (or in a trendless environment) you can quite successfully trade the turns based on VSA techniques.

 

Thanks for the reminder PP.

Darren

[TinGull 10]

Would you guys mind helping me out on this chart. One thing I'm still getting tripped up on is the background.

Have a look at this chart of the DOW mini (15 min chart), would one of you be able to point out the elusive (to me anyway) background?

I know Ravin's familiar with the YM, any pointers?

Thanks!

 

I don't know if this is the answer you're looking for...but weakness is apparent there with the lower hi's and lower lo's.

 

 

Often I think people can get tripped up in looking for smaller signs of overall weakness, when you've got obvious weakness in the form of a down trend. In that scenario, I'd be shorting all the no demand bars on rallies until that doesn't work anymore.

[jjthetrader 10]

Thanks Tin,

 

I didn't know what kind of answer I was looking for either but I think you answered it.

 

I was just seeing hidden potential buying with a positive test but then the market turned and headed downwards. This applied vice versa as well with selling so I assumed I had the wrong background information.

 

I was just wondering where to look really. I may be looking too far back or too close.

 

But you made a good point, in a downtrend look to short signs of weakness.

[TinGull 10]

Just a note on the chart i had posted in here a few days ago...SOLF...shorted on a doji "no demand" at resistance and today things are going very well. Nice gap down and currently is 14.6% lower from the close yesterday, and nearly 20% lower from my original entry.

 

[TinGull 10]

jj, I think you're looking for the wrong things, personally. I always used to want to catch the tops and bottoms, and thats what it sounds like you're trying to do. You mentioned seeing potential buying with positive tests....I'd be looking for that in an uptrend. in a downtrend, i want to see hidden selling, upthrusts, no demand...I don't pay any attention to what i think could be hidden buying, UNLESS it's seeming to strengthen up considerably at a large support area.

[ranj 10]

Just a note on the chart i had posted in here a few days ago...SOLF...shorted on a doji "no demand" at resistance and today things are going very well. Nice gap down and currently is 14.6% lower from the close yesterday, and nearly 20% lower from my original entry.

 

Great trade Tin.

But what makes it a great trade is not the no demand that you entered on within the gap but the distribution that occurred within the gray rectangle.

When I learned to look at the background as opposed to a 4-5 bar sequence is when I started to really see the power of VSA.

[mister ed 10]

When I learned to look at the background as opposed to a 4-5 bar sequence is when I started to really see the power of VSA.

 

That's good stuff ranj - thank-you.

 

Tin, well done on that trade, really well spotted and executed.

[TinGull 10]

Absolutely, ranj. Nice phase 3 and then a breakaway gap from that....amazing.

[TinGull 10]

 

Also, todays action. The grey rectangle is a tail from a candle on the daily charts at this level that it just broke through. This should act as resistance now.

[jjthetrader 10]

jj, I think you're looking for the wrong things, personally. I always used to want to catch the tops and bottoms, and thats what it sounds like you're trying to do. You mentioned seeing potential buying with positive tests....I'd be looking for that in an uptrend. in a downtrend, i want to see hidden selling, upthrusts, no demand...I don't pay any attention to what i think could be hidden buying, UNLESS it's seeming to strengthen up considerably at a large support area.

 

Yes but at some point in the day buying/selling has to come in and I don't want to be shorting when the bottom has been reached and we're moving sideways just before an up move. That's the kind of background I'm looking for.

I'm not really looking to call the bottom but to see if potentially we're done selling/buying for the day so I can act on "no supply" if at the bottom and not a "no demand" in the same range at the bottom. Polar Bears in Hawaii (if you've seen the boot camp).

[TinGull 10]

I haven't seen the boot camp, but think I can figure what that means.

 

As for what you're saying...sure, buying and selling has to enter into the market at some point on most days. Trend days are an anomaly to that whole thing, though. To me...if I'm playing intraday and price is coming into the last swing low and all of the sudden stops going lower...I'm out. I don't give it a second thought. Price stalled for a reason and I'd rather not be on the wrong side. Now if price glides through that, then Im ok holding. If price does bounce off that last swing low and goes a little higher, and then comes back down and bounces again...thats the background you're looking for regarding higher prices, IMO.

 

It's really about market cycles. Phase 1, 2, 3 and 4. Thats pretty much all the background I look for and then when I see the market break out of a cycle, I ride it. That's pure Dalton stuff. Hope that helps even just a teeny bit

[BlowFish 10]

BlowFish - if you have time could you elaborate on what you mean by "looking for continuation/change" please? And how VSA is useful for this? Thanks

 

Its really a way of continuously monitoring the market from the point of view of continuation or change. Those are the only two choices. This is opposed to looking for 'setups' to occur. Exactly how you react depends on your focus (what exactly you are trying to capture). Its a more 'going with the flow' style of trading rather than an 'entry - stop or exit' approach. As an example steadily increasing price and volume would support continuation of the price in that direction. That is until you detected change (e.g supply swamping demand, demand drying up whatever). I have to say that I am looking at things slightly less from a VSA point of view (at the moment at least) and more from a Whycoff point of view.

[jjthetrader 10]

Thanks Tin. There's more to weakness/strength then hidden potential buying/selling, I see that now.

[Anonymous 11]

jj, I think you're looking for the wrong things, personally. I always used to want to catch the tops and bottoms, and thats what it sounds like you're trying to do. You mentioned seeing potential buying with positive tests....I'd be looking for that in an uptrend. in a downtrend, i want to see hidden selling, upthrusts, no demand...I don't pay any attention to what i think could be hidden buying, UNLESS it's seeming to strengthen up considerably at a large support area.

 

Very nice TG.

 

A Test in a rising market is a powerful sign of future strength and allows one to surrender to the market.

[Anonymous 11]

This should go with the previous post.

 

Just an example of a Test in a Rising Market. As the name implies, you wont get in at the start of the move, but you do get in when the path of least resistance is clearly to the upside.

Edited March 29, 2008 by mister ed
Add back chart

[TinGull 10]

 

Right after a nice bull flag was that first test

[sleepy v2 10]

jj,

 

What happened with Fedex? ... #804

[jjthetrader 10]

jj,

 

What happened with Fedex? ... #804

 

I haven't updated my daily stuff yet but as of yesterday it is continuing down. Don't know what's in store for this one.

 

 

PP, in one of your earlier posts you said you put a blue dot if a certain condition is met and a red if another. What were your conditions?

[jjthetrader 10]

Here's another "what if" to help me understand background.

 

In the attached chart we see what could be hidden potential buying. We dip below S1, possibly to catch stops, and rebound back up to it where we see a no demand show up.

 

Is this a polar bear in Hawaii and is the market resting before a push up or is this a Polar Bear in Alaska and that hidden potential buying was not buying at all.

PP, since you take trades in this area what would you do?

Sorry to ask so many questions but I want to make sure I'm reading things correctly. You guys have been VSAing longer than myself so thank you for sharing.

thanks

JJ

[TinGull 10]

I wouldn't say theres potential hidden buying in the bar you've got marked. The spread wasn't outrageous...volume sure was and it closed just off it's lows...at support. Next bar was down showing that the effort to move down indeed gave us results. That's the biggest thing I watch for. Is the effort giving results? When you see no results from the effort, thats when the hidden buying becomes apparent. In this, I see price that broke a support level on significant volume and continued lower and is now retracing.

 

Take note of the volume that produced results. That last bar doesn't have nearly enough volume to be able to push through that supply left by the big volume bar.

 

Just my opinion...

[MrPaul 10]

Here's another "what if" to help me understand background.

 

In the attached chart we see what could be hidden potential buying. We dip below S1, possibly to catch stops, and rebound back up to it where we see a no demand show up.

 

Is this a polar bear in Hawaii and is the market resting before a push up or is this a Polar Bear in Alaska and that hidden potential buying was not buying at all.

PP, since you take trades in this area what would you do?

Sorry to ask so many questions but I want to make sure I'm reading things correctly. You guys have been VSAing longer than myself so thank you for sharing.

thanks

JJ

 

I think it is important when looking at charts like this to remember all the fresh supply at the top of the range has to become demand at some point but not necessarily accumulation demand. Therefore, instead of framing it as "hidden buying" framing it as simply "short covering" could help give a more precise picture.

 

What happens next is what is important and what will help indicate the next possible trade. One thing has the highest probability of happening in my opinion. That is...The market to fall (breaking the recent bar(s) low)

 

NOW...

 

Does the market fall on light volume test the recent lows? bullish

 

Does the market fall on heavier volume with spreads wider and closing at or near the lows? bearish

 

etc. etc.

[jjthetrader 10]

Thanks to both for your comments. Here's a chart of what happened after what I posted earlier.

 

Tin, I overlooked Effort, you're right.

 

I thought any wide spread down bar on ultra high volume closing off the low was hidden POTENTIAL buying and once you see the potential you then wait for confirmation.

But if I keep waiting and waiting for confirmation, where the heck do I enter my trade (without the wipsawing catching my stops)?

I suppose the bar after the no demand bar signals a continuation and I chould enter there eh?

 

Thanks for all the input.

[Anonymous 11]

TG.

 

While my post was to show a difference between a Test and a Test in a Rising Market, you brought an interesting point to light.

 

But first. Note the quick (and tradable) pop in price action after the Test in a Rising Market. This type of Test benefits from BACKGROUND strength which includes a trend in place as opposed to a change in trend.

 

 

Now for the really cool thing you alluded to. Note that I have drawn another black line to complete the pennant formation. Also note that we have a Long Shadow that forms a resistance zone and we get a No Supply that is completely within that shadow. The bar after the No Supply breaks the pennant, signaling a long trade for the price pattern watchers. VSA and WRB & Long Shadow analysis is doing the same.

Edited March 29, 2008 by mister ed
Add back chart

[TinGull 10]

I suppose the bar after the no demand bar signals a continuation and I chould enter there eh?

 

Yup, you got it