First thanks very much to Eiger for his wonderful thread. Second, as a beginner I thought it might be useful to say a little about certain VSA notions. It's not always easy to follow these because, depending on context (& Eiger points this out constantly), you can have what seem to be contradictory propositions. Gavin Homes refers to this, with some amusement, in one of the TG videos, & asks Tom Williams how can it be that weakness appears on high volume up bars AND low volume up bars.
So here goes, old hands are welcome to correct me & I hope this will help others who are still not sure.
I'll talk here about volume on down bars and the VSA classic: “When strength appears it appears on down bars.” This is a very valuable insight because it is counter-intuitive & invites us to look carefully at price action. “A big angry red bar with volume shooting up & I should be thinking of longs?” Well yes, BUT not just yet. We must look at the before and the after. Although we may look at individual bars we want see the market, and more precisely, the supply/demand relation, as a whole. Personally, as I look at each bar I also try to see it flowing from the previous bar and into the next.
One of the VSA signs of strength is the Bottom Reversal: a 2 bar signal. Bar 1 is down, preferably making a lower low than the previous 4 bars, with increased volume and at least average range or spread. Bar 2 is an up bar, closing on its high & preferably with a higher high than bar 1. VSA explains this by saying that the down barn, bar 1 contained buying & so the up bar, bar 2, is an up bar closing on the high. This is the meaning of: “When strength appears it appears on down bars.” We can nuance this a little
First, let's note here that we only see 2 bars because of our choice of time frame. If this was, say, 30 minute bars, then on the 1 hour time frame we would see a single bar closing high. A 15 minute time fralm would show 4 bars, with the final bar closing on its high. But the song remains the same, and it is this: in this 1 hour of price action (our 2 half hour bars), there was 1. significant activity (the volume) & 2. buyers were buying at higher prices & sellers were refusing lower prices: the supply/demand dynamic is causing higher prices. Let's call this Buying Pressure.
Once we have identified Buying Pressure we can go a little further by asking what kind of pressure-keen new buyers or frightened shorts covering? To answer this we have to look at what came before the bar(s) in question.
Would we go long on the evidence of this Bottom Reversal? Well, the conservative answer is no, we look for confirmation of strength in the market: a test bar. This will be a down bar but this time we are looking for low volume on the down bar, with narrow spread, & a close off the lows. (A no supply bar would also do just as well but I won't talk about that specifically here.). We want this bar to appear in an area where there was higher volume, ideally in the area of the Bottom Reversal but that won't always happen. Lower volume in an area where before there was higher volume tells us that market participants have moved on, this area no longer attracts activity. The narrow spread confirms this: the market is struggling to go down. And finally the down bar fails to close on the low. The path of least resistance is up.
The two bars confirm each other. The Bottom Reversal high volume down bar, bar 1, is confirmed by the low volume down bar which follows, the test. The low volume test bar is significant because it was preceeded by the high volume down bar in the Bottom Reversal.
With this in mind we can see that if bar 1 in our Bottom Reversal, a down bar, had been followed by another down bar, especially with increasd volume & at least average spread, then we would conclude that buyers were refusing to buy at higher prices and sellers were willing to sell at lower prices: a weak market. In every case we are asking: what is the balance between demand & supply. “When strength appears it appears on down bars” can be seen as an invitation to do just that. Like all VSA principles it has to be applied in context.
10-04-2009, 10:53 PM
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