[VSA] Volume Spread Analysis Part I

[Anonymous 11]

Through the Looking Glass:

 

Beautiful chart to post on what one should be seeing when he/she looks at the market through the prism of Volume Spread Analysis and WRB analysis.

 

In my opinion every trader should have a "story". That is, a reason "why" price does what it does. "Why" certain players behave in certain ways. "How" the players are. "What" an overbought reading on the RSI means.

 

VSA has a story. I believe in that story.

 

Let's take a look at how the story placed out last week. This chart is from Friday before the Payroll report.

 

The first thing to see is an Effort to Fall bar on the left side of the chart. VSA's story tells us that effort represent professional money trying to move price either up or down. This bar is also a WRB. I have melded the concepts of effort from VSA with WRBs.

 

Now, WRB analysis tells us that a WRB represents a change/shift in supply/demand among other things. Therefore if there has been a shift in supply/demand it is to the downside-an effort to take the market lower would mean adding supply to the market.

 

Okay, we need on more thing. Professional money is not sitting around a large table in a smoke-filled room saying " Let's try and take price down on the retail trader in 10 minutes.......". No some Professional money will want to go long and some may want to go short at certain price levels. So we see the cumulative actions in price and volume. Of course, those professionals that went short (for example when price rises) also see what is going on and are usually quicker than the retail trader to 1. admit they are wrong 2. get out 3.get long.

 

Okay now let's skip to the squat bar. Bill Williams tells a good story about what this bar means. It is , however not quite correct. Our story is that the narrow range means that the market makers are keeping the spread narrow because they have a particular perception of value. In this case they are bullish. Hence they are willing to buy from the sellers entering. These traders thing they are getting a good price but fail to wonder why. Note what happened. Range narrowed, Volume increased on a bar that made a lower low and not a higher high (Selling Bar). However, this bar is not weakness rather strength. The market goes up.

 

Take a quick look at the first effort bar. We do not close above the High of this Effort to Fall bar. Simply, the high is being supported on a closing basis.

 

Let's skip to the first No Demand bar. This is an Ideal place to go short. It represents a low volume signal within the range of a High volume candle. Now think about the story. Supply/traders rushed in an attempt (effort) to take prices down. Price went down a bit but now has made its way back up. If volume is low that must mean one of two things:

 

1. All the traders that went short are still bearish. If they were not and their stops were being hit, volume should be high.

 

2. No rush of new bulls is taking place at this time.

 

Again, think about what an Effort bar means. Professional money came in at a certain area with some resolve to move price down. Low volume up bars in this area should therefore be bearish: the high volume represent a desire to move price one way, the low volume should show the opposite. That is, no desire.

 

Now let's move to the next No Demand bar. Another nice entry/add on point. Note that we again have low volume in the area of previously High volume. That high volume in fact, is on an Effort to rise candle. Same as an effort to fall, just in the opposite direction. The story changes slightly.

 

This time we see traders willing to step in and buy the market, which results in the Effort to rise bar. Yet, price moves down. THIS IS NO RESULT FROM EFFORT. So we see no result from the effort to rise, but are seeing result form the effort to fall. Then we get an Up bar on low volume (second No Demand). Volume on an up bar is falling. Those who wanted to take price higher have lost their resolve to do so.

 

Think about it. In this price area (range) bulls stepped in. But now in this same level they seem to be nowhere. This must be a bearish sign.

 

One quick note: we could also see Upthurst or Squats in the area of previously high volume. These two are usually higher volume themselves, but there is a logical and consistent story here too. This chart does not show them. It shows the low volume sign within the range of previously high volume. Moreover, that low volume sign is within the body of a WRB......

 

This post was in response to an PM, hope it helps.

Edited March 26, 2008 by mister ed
Add back deleted chart

[BlowFish 10]

Ive been messing round with some VSA indicators. Sometimes I think they are helpful other times I think just plain charts with volume and nothing else may be the way to go. heres a snap I just took.

[mroalan 10]

i,m also of the opinion kiss.all i,m using is supp/res auto pivots/candles,and last and most important volume,trading the FTSE,yesterday was a blinder,i,m using a 15 min chart to trade also a 1hr chart just to watch the general direction,using Updata for charting package,also running a 15 simple average which has something built into it as it chucks out arrows for a change of direction 3 out of 3 yesterday,5 out of 6 today,so its caught my interest!

thanks for your input here i still read it every day,wired into my e-mail.

[mroalan 10]

Link did not work, attached image instead

[Tasuki 10]

I'm sure VSA does have some merit, but there are times, it seems, when the pros are dead flat wrong. See attached chart. Tradeguider, and some other people, present the pros as always being on the right side of the trade. I'm postulating here that they're wrong more than we'd like to admit. If I'm right, this would limit the value of VSA and would explain why it seems to work best in hindsight. Someone on this forum suggested that we call live trades here, and nobody took him up on it. Hmmm. OK, so you couldn't intraday trade from signals posted here because we're all busy trading. But swing signals--predictions of where various markets are going to go---if VSA can pass THAT test, then I'll become a believer.

[walterw 10]

Hi Tasuki, I am not much versed on VSA and I expect to see what the experts have to respond here, but I see a very nice VSA setup there as price keeps going up with less volume wich I understand so far that means no demand... correct me if I am wrong.... cheers Walter.

[notouch 10]

To be fair to VSA the theory is that weakness follows up bars with high volume which is exactly what happened in the chart you post. I agree that the idea of "Professional Money" always being right is nonsense. I'm also sceptical that high volume means "Professional Money" is active. Where VSA has value is in stressing that a reversal follows ultra high volume. That's just old school technical analysis though.

[walterw 10]

To be fair to VSA the theory is that weakness follows up bars with high volume which is exactly what happened in the chart you post. I agree that the idea of "Professional Money" always being right is nonsense. I'm also sceptical that high volume means "Professional Money" is active. Where VSA has value is in stressing that a reversal follows ultra high volume. That's just old school technical analysis though.

 

yes correct, calling it smart money may be a little tricky, because maybe that super volume spike was the dumb and uninformed money that bought there...

 

I think here Volume divergences its what counts, is it ?

[notouch 10]

Not for VSA no. The theory is that ultra high volume on an up day indicates a transfer of stocks from strong holders to weak holders. The down day that followed the high volume up day shows strong holders were selling (taking profit aka distribution) at the expense of weak holders. As there's no longer any interest in buying from professionals, the only move possible is down. I find VSA works very well on daily charts but only for swing and position trading, not if you're looking for a precise entry.

[walterw 10]

Not for VSA no. The theory is that ultra high volume on an up day indicates a transfer of stocks from strong holders to weak holders. The down day that followed the high volume up day shows strong holders were selling (taking profit aka distribution) at the expense of weak holders. As there's no longer any interest in buying from professionals, the only move possible is down. I find VSA works very well on daily charts but only for swing and position trading, not if you're looking for a precise entry.

 

Yes it does "setup" great trades... maybe for timing it would be interesting to make some kind of fussion with some cci type timing techniques in a smaller time frame... (1/5 maybe)...

[notouch 10]

I like VSA in combination with market profile and candlestick patterns.

[walterw 10]

I like VSA in combination with market profile and candlestick patterns.

 

I see... so you use candlesticks for timing..? do you look at smaller time frames for more specific timing entries ?

[notouch 10]

Yes, in fact multi-timeframing is an important aspect of VSA. Using the daily for direction and then the hourly, 15 minute and 5 minute charts for entry works well, especially when used with candlestick analysis.

[walterw 10]

Yes, in fact multi-timeframing is an important aspect of VSA. Using the daily for direction and then the hourly, 15 minute and 5 minute charts for entry works well, especially when used with candlestick analysis.

 

What would be the best time frame for a vsa "setup"... more reliable in terms of volume concepts readings ?

[notouch 10]

It depends on your trading style. I'm not very interested in the smaller time frames. At the VSA tutorial that a lot of us went to a few months back the speaker used daily, hourly, 15 minute and 3 minute charts.

[Anonymous 11]

yes correct, calling it smart money may be a little tricky, because maybe that super volume spike was the dumb and uninformed money that bought there...

 

1. Okay, assume the High volume is the retail trader, or dumb money. Now the real questions is this: WHO IS SELLING TO THEM?

 

2. You do not want to "believe" in Professional money, fine. But Does there seem to be a group that is on the correct side of a trade more often than not? When volume is high at a top or bottom, somebody was doing the selling (at the top) and the buying (at the bottom).

 

VSA seeks to emulate the traders that tend to be on the right side more than on the wrong one. Yet, in the book, Master the Markets, Tom Williams clearly says that some professional are wrong more than they are right. What separates them from the masses is their ability to admit they are wrong and get out of a bad position. They do not hope the market will turn in their favor. They do not curse their indicators (and most don't use any) when they are wrong, the simply reverse their positions.

 

3. VSA contends that 85% of a volume histogram is professional money. This is the one thing that I call the "leap of faith". Either you believe or you do not. But once you do, that means ALL volume bars are 85% professional money, even the small ones during the none regular trading hours.

 

4. Most traders have some idea of what the Smart Money is. One does not have to be specifically talking about trading syndicates to find value in the VSA story.

[walterw 10]

Shure Pivot... who cares what name we asign to the money...

 

Please answer me this question to this poor left brained man : The core concept of VSA could be volume divergence ? thanks Walter.

[Anonymous 11]

Ive been messing round with some VSA indicators. Sometimes I think they are helpful other times I think just plain charts with volume and nothing else may be the way to go. heres a snap I just took.

 

 

Keep up the good work. Would love more of an explanation of what the dots mean. I know some can figure it out but for the newbies it would be nice.

Thanks for the chart. Please keep them coming.

[Anonymous 11]

I'm sure VSA does have some merit, but there are times, it seems, when the pros are dead flat wrong. See attached chart.

.

 

You are soooooo wrong here.

 

We have Ultra High Volume on an up bar.

 

VSA teaches that the market does not like high volume upbars. Why? Because there could be HIDDEN selling within that bar. Note that the next bar is down. Why? Becuase there was supply dumped on the market. The Pros were selling not buying............

 

I do not mean to sound harsh. But it the basic premise of VSA that WEAKNESS comes in on up bars and STRENGTH comes in on down bars. Simply, if you were looking for more upside, then you, not the pros, were wrong.

 

P.s. Professional money is not professional money because it is never wrong........... It is professional money because it is BETTER at being wrong.

[Tasuki 10]

Pivotprofiler, Thanks for explaining about why the market doesn't like high volume upbars (or downbars I presume)--I never got that clear in my head before.

Technically, I can't be wrong if it's true (as you said in an earlier post) that 85% of the volume of any bar is professional money. On that bar in my chart, the high volume upbar, it would appear that 85% of the professionals were wrong, yes? If they represent most of the money, then by definition, most of them were wrong to go long as the market was about to retreat. I don't see any way around that.

BTW, be as harsh as you like. I've got a tough hide, and there's no doubt that you're the master of VSA here. I'm just here to learn, so I throw stuff out as I see it.

[BlowFish 10]

Tasuki thanks for reviving one of my favourite threads. I am a long time student of VSA but still have some niggles. I am about to travel so will have to be brief.

 

I do wonder about whether the smart money is always right or even if they 'know' a lot of the time. Often you will see a struggle going on and it is not clear who is in control (bulls or bears). There is also smart money operating on many different time frames (hence the 'fractal' nature of markets). This also makes it difficult to get a 'read' sometimes. For example if a large fund is accumulating millions over a period of a week or two you are unlikely to see this on anything less than daily bars....perhaps hourlies at a pinch.

 

Perhaps it dosen't matter if the money is smart or not - money is money :-) Actually if we believe that 85% volume is professional then there must be a large percentage of losers amongst those pros (35%) (certainly in futures which are zero sum).

 

The main thing I struggle with on a technical level is whether there is enough volume to stop a move and cause the market to go sideways/the opposite direction. Or whether it just causes a pause (2,3 or more bars 'rest'). as other pointed out the chart Tasuki posted is classic supply entering on the first bar followed by what Tom might call a 'hidden test' bar 2. I have seen very similar patterns where the buyers will re-assert themselves on bar 3 or bar 4. Now I know the theory tells us the next few bars hold the clues but often both buyers and sellers will withdraw and price will just drift only to have buyers step back in after a breather.

 

Another problem of course is that the open tends to be high volume anyway as the overnight paper is dealt with. I believe that was a chart of the open?

 

Cheers.

[notouch 10]

I think there's too much variety to make simplistic classifications of smart money/dumb money or Professional/non-Professional Money. In particular I think professionals are mostly active on longer time frames which is why the daily charts are useful but the 5 minute charts are fairly useless from a VSA perspective. Those people buying the recent pullback may have looked dumb for a few days but they look smart now. It all depends what timeframe you trade.

 

Also as I've said before I think hindsight analysis is worthless. With hindsight it's easy to see which bar in Tasuki's chart was the high volume bar. In real time though a high volume bar can be followed by a bar of even higher volume and then another one of even higher volume so you could end up selling into a rising market or trying to catch a falling knife. Only with hindsight does it all seem so clear where the high volume bar was.

[TinGull 10]

To a degree, I agree with you notouch. I dont think its as simple as saying "smart money/dumb money". I whole-heartedly disagree with you in saying that VSA is worthless on a 5minute chart. There are many professionals who day trade and 5minute charts can show a lot when it comes to volume analysis.

 

As for hingsight...just wait for the stinkin' bar to close I for sure don't want to be the first one on the train, just in case I got on the wrong one. I'd rather wait...see what volume did on that bar, and then if it was high volume, wait for the next bar to see if that volume stopped the upheaval or downward movement...whichever direction its going.

 

For folks that do swing trading...5minute bars will be worthless. For those that hate to hold overnight, 5min bars are very telling. Anything under that and I have a real hard time reading them. 5minute would be the lowest I would go, with a real liking for the 15minute bar.

[notouch 10]

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

 

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

 

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

 

[Anonymous 11]

Pivotprofiler, Thanks for explaining about why the market doesn't like high volume upbars (or downbars I presume)--I never got that clear in my head before.

Technically, I can't be wrong if it's true (as you said in an earlier post) that 85% of the volume of any bar is professional money. On that bar in my chart, the high volume upbar, it would appear that 85% of the professionals were wrong, yes? If they represent most of the money, then by definition, most of them were wrong to go long as the market was about to retreat. I don't see any way around that.

BTW, be as harsh as you like. I've got a tough hide, and there's no doubt that you're the master of VSA here. I'm just here to learn, so I throw stuff out as I see it.

 

 

First, I did not mention that it is nice to have you on board. Nice chart set up you have there. Please keep the chart examples and posts coming.

 

Now for the meat.

 

As I have mentioned, I do find the 85% idea as the only real "Leap of faith".

 

Now, let's look at you nice chart again. I do not know if that large volume spike candle was made due to a news event. VSA asserts that professional money uses news events to manipulate price and market direction. Suppose that there was a news event that was "bullish", well the professional buying was on the left side of the chart. The professionals would be buying at wholesale, and the large volume spike would be the bar that they sold on. They would be selling at retail. On that news event, the herd would rush in and be bullish.

 

So in truth, the volume surge is more likely to be the herd. The question, as always, is WHO IS ON THE OTHER SIDE OF THE TRADE?

 

If there was more buying on this bar than selling, then the next bar should not be down. More over, the bar after that is a Hidden Upthrust/Trap UP Move. This is a manipulated bar designed to get traders long and is a good place to short (with the weakness seen in the background).

 

Basically, you have to get away from the idea that large volume on an up bar is inherently bullish. You need to look at:

 

1. the range of the bar (spread)

 

2. the close of the bar

 

3. What happens on the next bar and sometimes even the bar after that.

 

Also note that there are no old tops to the left that can be seen on your chart. This is more reason to assume that the high volume is masking selling, rather than actual buying by the Smart Money.

 

Remember, we (VSAers) are not saying that professional money is sitting in a smoke-filled room conspiring together. We see the composite of their actions thru volume and price. So in practical terms, it is possible that some Smart money trader did indeed buy on that bar , if that makes you feel better.

 

One more thing:

 

The retail trader is now wondering if there is something to the adage: "buy the rumor and sell the fact". The Smart Money bought the fact ( while it was rumor to most) and sold the fact when it was widely known.

 

But this may not of even be due to a news event as I do not know exactly when this chart pic was taken.