Volume Spread Analysis ( VSA)




Volume Spread Analysis: Now we have learnt a little about candles, and what is called technical analysis, we are going to combine this knowledge with our main online trading indicator, which is VOLUME, and cover a topic called Volume Spread Analysis. Volume is like the water in a hose pipe, and the greater the water pressure, the more powerful the flow. So where we have a stock or forex candle with a wide body we expect to see high volume. It takes effort to move downhill as well as up, so if you see a wide body down candle with low volume then you know this is a false move and you are being led into a trap by the professional traders.
They are simply trapping traders into thinking prices are falling - do not be drawn in to the trap down move - prices will go back up very quickly once the market makers have shaken a few trees and bought enough stock at low prices. The study of candlesticks when combined with volume, is called volume spread analysis.
They are simply trapping traders into thinking prices are falling - do not be drawn in to the trap down move - prices will go back up very quickly once the market makers have shaken a few trees and bought enough stock at low prices. The study of candlesticks when combined with volume, is called volume spread analysis.




This is the stock chart for Hanson plc, and is taken over a 5 month period, with each candle representing a day's price movement. The up thrust we are going to look at is that on the 15th March. It is an unusual up thrust ( 15th March ) as the wick is very long, however it does demonstrate the principle rather well so I thought it would make a good example. As you can see prices have been rising steadily when suddenly a huge up thrust occurs, which should set the alarm bells ringing. Look at the volume underneath it is 5 or 6 times the normal volume for the share. Something odd is happening. The professional money is selling heavily, trying to keep prices up whilst they try to dump shares on the unsuspecting.( lots of effort with no reward - danger ! ) They are constantly overwhelmed by selling coming onto the market. The bears have won this battle and there could be a change. Note that this does not take effect immediately. We monitor candles for the next few days to see if weakness appears, which it does with another upthrust 5 days later, this time on lower volume. Prices start to move downwards, eventually falling sharply in Mid May.
Our analysis is therefore that after this first sign of weakness then wait for a further confirmation signal, which comes 5 days later, confirming that there is weakness in the market. Based on these two candles we would take a short position, with an expectation of prices falling in the next few days. Now, what this analysis can never tell you is how large the move will be or how long it will last. The exit point for your trade is down to experience, and an analysis of the candles for possible turning points in the opposite direction! This is what volume spread analysis is all about - giving you an insight into what is actually happening in the market, and more importantly what is likely to happen in the future!

OK, let's look at another example. Here again, you can see the upthrust in mid May. Notice how in this example, the opening price on the bar, is higher than the closing price on the bar the night before. We call this 'gapping up' and occurs where there is a gap between the closing price of one bar and the opening of the next. The professional money has 'gapped the prices up' to add to the impression that prices are going up! The upthrust sits 'suspended' above - this is another classic sign. The volume has increased although not as marked as in the previous example. However with increased volume and an upthrust that has been 'gapped up' we should be cautious. This is followed by a down bar and in the following down bars, volume increases as we would expect ( increased effort both going down and up ) - the down bars are wide with volume in line with what we would expect to see - we therefore assume that prices are going to fall.
Now it is important to note that in technical analysis using charts and volume, we are NOT trying to predict tops and bottoms ( nobody can, but many have tried). What we are doing is looking for possible turning points, then waiting for confirmation before we do anything. Once the move has been confirmed we may then decide to trade. What it also does not tell us is the length of the move, which could last days, weeks or months. This is why we have strict money management controls in place, just in case we are wrong or the move only lasts for a short time and then continues in its original direction.

Volume Spread Analysis - The Downthrust


Now that we have looked at the upthrust, lets take a look at its sister the DOWNTHRUST. Towards the end of March, we have two downthrusts, one after another. Note the high volume of the first one ( blue ) which is huge, suggesting that the professional money has definitely entered the market and is buying into the market. The bulls have overcome the bears and stopped prices falling. This is followed by a second, still on high volume. We wait for confirmation, and within a few days prices start to rise. Note that at mid May there is an upthrust but on relatively low volume. Upthrusts and downthrusts can occur on low volume - it is a trap move by the professional money and could therefore be a false signal. You just have to try and interpret what is happening. However, high volume is generally a giveaway signal that this is a true signal.

Volume Spread Analysis - Look For The Abnormal


The last example will hopefully make the point about volume in general and is simply this - that when you see abnormally high or low volume, something is happening, and you need to investigate further by analysing your candles. Have a look at the following chart which I hope will give you the idea. What I would like you to look at here is the 6 days of volume around mid-March at the 180-190 price level - lots of volume with no corresponding increase in prices ? Clearly there is something wrong here so we need to wait and see. Is it possible that the professional money is selling into the higher prices before prices fall ? More than likely! Note the wide spread bars on the way up have corresponding high volume so at this stage everything looks OK. volume = effort =results.
In summary, these are the sorts of questions that you will start to ask yourself once you start to study charts on a regular basis. There are many candle formations and types that you need to learn and understand and all I can do here is to try to introduce the concept and some basic ideas which I hope has given you a basic understanding of the subject, and that the combination of candles and volume can give a real insight into what is happening in the market. Much of your analysis will be common sense and it will not always be right - you have to accept that there is no perfect method to trade, but the above is based on good common sense and the only indicator the insiders cannot hide, and that is volume. Analysis of candle charts can be very revealing and worth the effort - believe me! - your trading will take on a new dimension as you start to read the markets whether they be in stocks, options, currency, futures, or indeed anything else.

19 comments:

  1. Why not place a indicator on your chart ? You can accomplish the same thing. For example, Whyckoff teaches us development is the key to a successfully entry. In a bottom market, you must have a few elements. First a climax, second a part way recovery & third, cash in your pocket. The part way recovery confirms the bottom, it shows the selling which caused the decline has been taken in & how price reacts as a response to this buying ability either draws our more supply or dries it up as the stocks appears dull. To do this with a indicator, thats easy. place the williams%R for over bought & over sold indicator on a week chart. First you must be extreme over sold by the week. Eventually go to a day chart & use the williams %R indicator but this time look for overbought. At this time, you should have recovered part losses. Next you need be over bought. You your own judgement skills. This over sold may be a shakeout or it may be a back up to go higher. It depends on how much supply exists prior. Either way, in a general trading range, you need to be over bought one more time then over sold for the back up to resistance but for reaccumulation, the second oversold in general the final over sold in the range. Again, use your own judgement chart reading skills from whyckoff or VSA. The problem with VSA is it requires you to watch every single move.. thats fine for a active trader but for bottom traders, reaching charts once a week is ideal. Using a indicator & setting it to alert you via email when condition is met is awesome. Both VSA & whyckoff is about a cause. If you place the MFI ( money flow ) index on a week chart then draw a line over 2 lower peaks then, once the supply line is penetrated, you should have taken back part gains which would suggest the ending of phase B of the whyckoff trading range. From there you go through the testing phase. Also note, if you do not have 2 down peaks in the money flow index indicator then you have not met a bottom.. you need to see buyers lift price then fail otherwise your in a reaction. There you go, taking VSA, whyckoff & using technicals to show you the same thing without getting whipsaw around. With that, take a vacation.. no need to glaze at charts 24 hours a day. OK then happy charting :)

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