Volume spread analysis

To avoid great losses, you should carefully track the price moves and immediately close the position, if the trend is not confirmed on the next bars. In the four-hour BTCUSD chart, there are two wide spread bars on fairly high volume. Furthermore, the volume starts increasing once the price is just approaching the lower trend line.

  • In volume spread analysis (VSA), this is known as accumulation where the insiders fill up their ‘warehouses’ thus increasing the ownership of the assets.
  • If it appears in an uptrend soon after the accumulation phase, no reversal or even a strong pullback is likely.
  • But as the price has been rising, the sellers started to come to the market.
  • According to the VSA proponents, insiders use media and other tools to create a sentiment among traders, either bullish or bearish, depending on what the manipulators need.
  • Knowing how to read and understand the relationship between volume and price will help you accurately predict the market direction.

But the rest of the traders keep that from happening, pushing it in the opposite direction. The same as in the case of a supply test, a demand test suggests that market makers are ready for a significant move, this time the move down. Whether the test is successful or not suggests whether the move will happen soon or will be delayed a bit. Just knowing how many participants are involved in the market is of little use without knowing what they are doing. That is why combining the study of both price moves and the accompanying volume can seem like a good idea. Such a type of analysis can potentially be a tool to help you understand what is going on with the market and where it can be heading next.

Buying climax and selling climax

If the volume drops to 8000 the next day, we can say that the volume has declined. Third, select stocks that have a cause that equals or exceeds the minimum objective. And finally, time your commitment with a turn in the stock market. First, you should determine the present position and probable future trend.

And while specialists were setting the price lower (at least fans of the VSA think so), most traders were no longer interested in selling at such a low price. This anomaly supposedly signals that either a bullish correction or a trend reversal is in order. It can provide a good opportunity to open long positions while the price is low. But analysts using the VSA advise waiting for the validation of a bullish move before doing so. What can the Volume Spread Analysis tell us about this chart?

Trend analysis and cycles in VSA

In the 1970s, this system was taken by Tom Williams, who developed it into its present form, popularize it and named the system Volume Spread Analysis. According to the author, this system applies to all time frames and all markets, where we have high quality data feeds. But before moving to specific candle patterns, you need to know the main principles of candle pattern analysis in the VSA. This chapter explains candle patterns from the Volume Spread Analysis point of view. It talks about the most important patterns, the significance of their placement in the trend, and their relations to volume. Now, let us look at arguably, more exciting examples — anomalies.

Volume spread analysis

For starters, those who believe in the Volume Spread Analysis always watch the volume. During the consolidation phase, they want the volume to tell them whether it is a small pause in a trend or a reversal. They think small volume during the sideways movement usually signals that the market just took a short breather before resuming the previous trend.

What is a spread?

But in the case of multiple candles, it should validate not just every candle itself but also the overall trend. After all, the Effort vs. Result rule applies to trends the same way as it does to a single candle — the stronger the trend bigger the volume that should create it. Other types of charts, such as bar, line, or Kagi charts, are ill-suited for it. The form of analysis that studies both price action and volume is called Volume Price Analysis or Volume Spread Analysis. The ‘spread’ part in the latter name refers to the spread between the opening and the closing price. This article will use the term ‘Volume Spread Analysis’ (or VSA for short).

But you do not see any results on the high volume by the next day (or bar), the price doesn’t continue growing. In these cases, The high volume must have contained more selling than buying, which, of course, doesn’t support the up-move. In a down-move, the high volume results from more buying than selling in these cases.

Absorption volume and lower trend line

While analyzing the Forex market, most traders focus on prices and their moves. After all, buying low and selling high is the basis of trading. But the price is not the only metric by which you can judge the market. If, for example, a few traders decide to sell a currency, it does not mean much. But if thousands of traders decide to do the same, it probably warrants attention.

The name Richard Wyckoff is usually brought up when talking about the origin of the VSA. He was an American stock investor as well as a founder and an editor of the Magazine of Wall Street. After founding a success in financial markets, he decided to become an educator and teach other investors and traders so they could follow in his footsteps. Again, in this stage, the media also plays a crucial role in exciting these assets that insiders own. So, as a result, the price of the assets, which had significantly declined, started to rise suddenly. Accumulation represents the first step in understanding what happens to be the “volume price analysis”.

thought on “Volume Spread Analysis in Trading”

For instance, if you’re an entrepreneur who sells shaving blades, the more you sell, you’ll need to market your products and showcase their advantages against the price. Once you’re done so, it’s time to ensure that your chosen broker offers reliable volume. Finally, it’s essential that you pay attention to the chart’s timeframe since, in most cases, volume analysis on short timeframes will not make much sense. Volume spread analysis indicator processes data of thick volumes.


Recent Posts