Volume Spread Analysis

[herkfsu]

I am going through an ebook about volume spread analysis and so far I am a little confused. My logic would tell me the best way to use this type of analysis would be on bars with either

a. narrow range and high volume. shows there are large sellers or buyers(smart money) who are willing to get out or get in at the current price level. often a reversal of the direction of the bar

b. large range and low volume, shows there is a lack of supply or demand(again smart money) who is willing to come in and reverse the move. often a sign of continuation of the direction of the bar.

The book talks about large volume bars with large spreads and low volume bars with tight spreads. It seems like you would get very little information out of these bars. How do you guys interrupt these two types of bars. When you see them after certain moves what do they mean to you. To me large volume says there is big money in on the move, but when accompanied with a large spread I would really be comfortable in saying the big money is buying or selling. The book also talks about large volume with large spread could be a sign of a reversal(not quite sure how yet, still reading). But if some one could help me shed some light on this and give their opinion I would really appreciate it. Thanks guys!

 

[jessechan]

there's loads of info about vsa on traderslaboratory.com, see if it helps

 

[Slapshot]

Herkfsu,

VSA is a methodology based on price/volume action, which in turn involves reading the bars (and associated volume) not only as they unfold but also how they are related and relevant to the previous bars. No doubt others will chip in here, but you can't just read one bar and expect it to tell the whole story.

Let me give you an example. A market (doesn't matter which) has been in a long bull move, the market gets to a point where it's into new high ground, i.e the highest the price has ever been or has been for a long time (relative to the time frame your trading). As price gets to that point the volume increases where it is far greater than anything before AND the price closes off the high (middle/low), this indicates supply. The market stalls and starts to go sideways, all the news is good, new highs etc, the public are sucked in, fear of missing out on the never ending bull run. On this day or within a couple of days there is a narrow range bar into new high ground but the volume is greatly increased, increased even on the previous high volume. The question you have to ask is if the volume has increased significantly why hasn't the price taken off? Something is capping the market. All those who are not aware of what is going on are buying, the pros are happily fulfilling their requests (selling). The weakness has come before in the first few high volume bars. Down we go.

It doesn't always happen like this, but the point I'm trying to make is that you can have high volume up bars on wide spreads and narrow spreads, you can have low volume up bars on wide/narrow spreads and the same can be said on down bars. The real skill is learning where these bars are important in relation to the action that has already taken place.

Take a look over at traderslaboratory as jessechan says, there's a couple of dedicated VSA threads.

Hope this is of some help to you.

 

[herkfsu]

Herkfsu,

VSA is a methodology based on price/volume action, which in turn involves reading the bars (and associated volume) not only as they unfold but also how they are related and relevant to the previous bars. No doubt others will chip in here, but you can't just read one bar and expect it to tell the whole story.

Let me give you an example. A market (doesn't matter which) has been in a long bull move, the market gets to a point where it's into new high ground, i.e the highest the price has ever been or has been for a long time (relative to the time frame your trading). As price gets to that point the volume increases where it is far greater than anything before AND the price closes off the high (middle/low), this indicates supply. The market stalls and starts to go sideways, all the news is good, new highs etc, the public are sucked in, fear of missing out on the never ending bull run. On this day or within a couple of days there is a narrow range bar into new high ground but the volume is greatly increased, increased even on the previous high volume. The question you have to ask is if the volume has increased significantly why hasn't the price taken off? Something is capping the market. All those who are not aware of what is going on are buying, the pros are happily fulfilling their requests (selling). The weakness has come before in the first few high volume bars. Down we go.

It doesn't always happen like this, but the point I'm trying to make is that you can have high volume up bars on wide spreads and narrow spreads, you can have low volume up bars on wide/narrow spreads and the same can be said on down bars. The real skill is learning where these bars are important in relation to the action that has already taken place.

Take a look over at traderslaboratory as jessechan says, there's a couple of dedicated VSA threads.

Hope this is of some help to you.

Thanks for the reply.

From what I have read, VSA tells us 85% of the volume in the market(or on high volume bars?) is smart money. The price can go usually where the smart money wants it to go as long as it can get the public to go along with it.

So say for example there is a bull market that hits new highs on a wide spread bar that closes near the top with high volume. Over the next several bars there is indication of NO DEMAND and the price then starts to slowly drop. In this situation, was the smart money wrong in pushing up the market? Was the smart money really the ones pushing up the market? They had to have been active because there was huge volume. What should you be looking after such a bar? Would a NO SUPPLY bar right after the spike cause a true VSA trader to go long? What is a NO DEMAND bar followed? Would a VSA trader go short? What should you wait for for an entry and should you be looking for a particular direction after a certain high volume/wide range bar?

Thanks guys.

 

[Slapshot]

Thanks for the reply.

From what I have read, VSA tells us 85% of the volume in the market(or on high volume bars?) is smart money.

You're welcome,
I've not read anywhere on the percentages of smart/dumb money and to be honest it doesn't matter.

The price can go usually where the smart money wants it to go as long as it can get the public to go along with it.

Markets are marked up/down accumulated/distributed and so on BY the consensus of the 'smart money' or big players.

So say for example there is a bull market that hits new highs on a wide spread bar that closes near the top with high volume. Over the next several bars there is indication of NO DEMAND and the price then starts to slowly drop. In this situation, was the smart money wrong in pushing up the market? Was the smart money really the ones pushing up the market? They had to have been active because there was huge volume. What should you be looking after such a bar? Would a NO SUPPLY bar right after the spike cause a true VSA trader to go long? What is a NO DEMAND bar followed? Would a VSA trader go short? What should you wait for for an entry and should you be looking for a particular direction after a certain high volume/wide range bar?

Thanks guys.

Let me break your question down:

So say for example there is a bull market that hits new highs on a wide spread bar that closes near the top with high volume.

How have we got to new highs? Have we been in a sustained up move or have we pushed up through a trading range to the left? First, could be a potential sign of weakness, second could be a sign of strength.

Over the next several bars there is indication of NO DEMAND and the price then starts to slowly drop. In this situation, was the smart money wrong in pushing up the market? Was the smart money really the ones pushing up the market? They had to have been active because there was huge volume.

If we've been in a strong up move prior to the high vol wide spread up bar and that is the beginning of the end then usually it will take time to distribute, in which case you would expect to see several No Demand type bars. Whether the smart money was wrong or right is irrelavent, it's what they are trying to achieve that is. I think you've answered your own question with you last two sentences.

What should you be looking after such a bar? Would a NO SUPPLY bar right after the spike cause a true VSA trader to go long? What is a NO DEMAND bar followed? Would a VSA trader go short? What should you wait for for an entry and should you be looking for a particular direction after a certain high volume/wide range bar?

You're waiting for confirmation that true weakness or strength to show, again this depends on what has happened before the high vol bar. A No supply bar immediately after could be a sign of strength, it could also be the market resting, again this depends on what happened before the high vol bar, they're all related. No demand can be followed by many things but for it to be true weakness you would expect other signs of weakness as detailed in the book you're reading, which I assume is The Undeclared Secrets or Master the Markets?

Building your own trading plan based on the price action you're seeing is essential and it's something you're going to have to develop yourself. Study the charts for as long as it takes for the important action to jump out at you.

 

[herkfsu]

Thanks!

What are some characteristics I would be looking for prior to the high volume bar? To me it seems like I could make a case for bullish or bearish move interpreting the bars different ways. From your personal experience could you give me something that you might look for?