[VSA] Volume Spread Analysis Part I

[flatwallet]

Pivot,

Could a No Demand bar be viewed as a bar that foreshadows a continuation pattern?

Also, when we talk about excessive volume, are we just talking about volume relative to the past few bars or are we trying to say that it is 2, 3 or 4 times the average volume (intraday)? And if so, how would we measure the average volume? Would the average of past 50 bars be good enough?

I know it's a lot of questions but I'm just trying to get my arms around all the concepts. It so good to be part of this board as there aren't too many sites out there that can explain this stuff. Plus, there aren't as many knowledgeable people on those sites that are helpful.

Thank you berry berry much

[Anonymous]

Very interesting chart here.

I makes these posts to help me learn as much as anybody else. I am really starting to see the relationship between High/Ultra High Volume areas and subsequent Low Volume signs within that area. If I had any doubt about the importance of volume, I certainly don't now.

Many of the charts are repetitive but there are two main reasons for that:

1. Theses things repeat day after day and on all timeframes.

2. Pattern recognition.

At any rate, here is a really cool chart with much of the same AND a new twist.

First, we see a down dark candle line on Ultra High Volume. But the next bar is up. Therefore there must of been some demand (buying) on that dark candle line. That next up bar, in fact, has even more volume and closes off its highs. We know that the market does not like wide spread candles on High or Ultra High Volume. At this point, we also have a white (close>open) WRB. Thus by extension, we have a Support/Resistance zone. Remember, WRBs represent changes or shifts in the supply/demand dynamics in the market.

The bar following this WRB is up, but the volume is less than the previous two candles and the range has narrowed. The candle following the No Demand is down. Now we can see that the WRB did indeed have some supply in it. (while this is after the fact, if we step back and look at what price did following the WRB is move sideways. Which means there must of been supply entering on the WRB. But this after the fact notion only confirms what we see during the fact.)

Note that the bar following the No Demand is itself a No Supply bar. The volume is less than the previous two candles with price closing lower than the previous bar. On the very next candle we see a test. This test, however, is not a low volume test but rather a higher volume test. As usual, we look for the confirmation of the test to come one to two bars later. Here it does indeed come on the next bar. But this next bar is also a No Demand bar. It has a smaller range, closes higher, and has volume less than the previous two candles. At this point I would depart from VSA just to note that this is not a High Close Doji as the close is equal to the high of the doji, not higher.

Before going into this bar a bit more from a VSA perspective, let's jump ahead two more candles. We see a narrow bar that makes a lower low, closes in its upper portion on lower volume This is a test. KEY THINGS:

1. This second test has a narrower range than the first test.

2. This second test has less volume than the first test.

3. This second test does not make a lower low than the first test.

4. This second test comes within the range of a high volume candle, more specifically, within the body of the High Volume white WRB.

This second test is confirmed the next candle by a bar that closes higher than the close of the test bar itself. NOW WE HAVE A HIGH CLOSE DOJI, as the close is also higher than the high of the doji test candle. Note that the volume is higher than the test candle. In fact, the volume is very high on a wide spread. But this time we have PUSHING THRU SUPPLY (a sign of strength).

The difference in the two confirmation candles after the respective test candles; Activity. Professional Money was more active on the second as evidenced by more volume than on the first.

[Anonymous]

Originally Posted by flatwallet Pivot, Could a No Demand bar be viewed as a bar that foreshadows a continuation pattern?

This is a very tricky question. The short answer would be yes, however. What you need to keep in mind is the most basic definition of No Demand/No Supply. A bar/candle with volume less than the previous two bars/candles closing up (or equal) from the previous bar/candle for No Demand. And closing down or equal for No Supply.

Using the base definition, many bars/candles fall into the category. This is one reason I look for those that fall within the body of a WRB or shadow of a Long Shadow.

Also note that this is why TG only paints No Demand/No Supply on certain bars. The ones where the next bar confirms a No Demand, for example, by closing down. Yet, when Todd speaks of a bar, he will call it No Demand as soon as it closes.

Joel Pozen paints almost every low volume bar (volume less than the previous two). These are the only VSA signs on his charts, but even still the chart can get cluttered with them. Many times a No Demand will paint but the next bar will be up. This does not change the fact that the bar was No Demand from a base definition point of view, but it does create multiple signs and belies the really important ones.

But back to your question, they are going to show up in both reversal and continuation situations. Location and context determine which.

Originally Posted by flatwallet Also, when we talk about excessive volume, are we just talking about volume relative to the past few bars or are we trying to say that it is 2, 3 or 4 times the average volume (intraday)? And if so, how would we measure the average volume? Would the average of past 50 bars be good enough?

Both. We look at volume in relation to the previous 1,2 or 3 bars. We also look at an individual volume histogram in relation to all previous bar on the chart that can be seen at the time.

We also look at the individual volume histogram by itself. Here we are looking at actual size (amount does not matter). A 30 period moving average can be used to determine if volume is greater than average or less than average. If you put a 2.0 standard deviation of that 30 average on the chart as well, then you could call all volume histogram bars greater than that line high. You could also place a 3.0 standard deviation of the average on the chart and call all volume histogram bars greater than that Ultra High Volume. This is basically what TG does.

Now, a volume histogram bar can be both Ultra High (greater than the 3 standard deviation line) and Low Volume (less than the previous two volume histogram bars).

[flatwallet]

Thank you so much for yet another free lesson. I have programmed my TradeStation Strategy to calculate the 50 period volume moving average (5 min charts) and set a 1 bar trailing stop when volume exceeds 3 times this average. I can't tell you how much money it has saved me. I wish I knew how to find a way to exit the trade immediately rather than trail it by one bar. But that's a different story. Thank you.

[Anonymous]

Something different.

I was going to post something but changed my mind. Instead, I would like to hear from some of you. Where would you enter (if at all ) and why?

[Gordon G.]

Hi PivotProfiler,

if you mean "where would you have entered", I would reply at the close of the black candle following the 1st No Demand bar.
However my stop would probably have been hit and I would have closed my position with a loss.

Best regards.

[flatwallet]

Pivot,

I would have entred during the black candle but at the lows of the first No Demand bar - .01. My stop wouldn't have been hit beacuse I usually place my stops at the highs/lows of a 5 channel. That being said, I would consider myself lucky.

flatwallet

[Anonymous]

Originally Posted by flatwallet Pivot, I would have entred during the black candle but at the lows of the first No Demand bar - .01. My stop wouldn't have been hit beacuse I usually place my stops at the highs/lows of a 5 channel. That being said, I would consider myself lucky. flatwallet

Nice. Thank You for the reply. Please post some charts with examples, we can all benefit from your knowledge.

Originally Posted by Gordon G. Hi PivotProfiler, if you mean "where would you have entered", I would reply at the close of the black candle following the 1st No Demand bar. However my stop would probably have been hit and I would have closed my position with a loss. Best regards.

First, Hello GG. I am glad you joined me here. You seem to be making good progress. Keep posting.


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From a pure VSA point of view the ideal entry is when the No Demand is confirmed. We have a lot of weakness behind us in the form of a failed test and supply entering on up bars with high volume. For me, however, I like the No Demand within the two support/resistance zones: the WRB and the Long Shadow. For some it is a bit late, but note that here a stop just above the No Demand would never be in jeopardy. Moreover, here we are actually using the low volume sign that appears in the range of high volume candles.

[Anonymous]

No Result from a Test

"No immediate results from a previous test can show weakness is present in a bear market. However, you should remain observant for a second test in a strong market. If you can see a what appears to be a successful test, the market makers, or specialists will also have seen the indication. If there is not an immediate up-move, or the up-move fails over several days (or bars, if on a shorter timeframe), this now becomes a sign of weakness. The professional money has not responded because at that moment they are still bearish.", Master the Markets, Tom Williams, P. 155.

A while ago myself and BrownsFan got into a discussion about "knowing when you are wrong, or at least early into a trade". He argued that he does not know he is wrong until his stop is hit. My point at the time was that one can see if he is wrong, or wrong on timing, prior to the stop being hit. Therefore, like the POP said, there is no need to wait for the stop to be hit. Don't wait for the market to prove you wrong, look for it to prove you right.

What neither of us mentioned was something NihabaAshi is a proponent of: a Contingency plan. Basically, a contingency plan is a price action pattern used to tell you something has changed and the prior signal is no longer valid. Once this pattern appears, a long is reversed into a short. Note this is different than a simple stop and reverse procedure as it is possible for the contingency plan to be triggered before one's initial stop is hit.

If you are interested in contingency plans, NihabaAshi is the one to talk to.

What this chart shows is based on the concept however.

First we see a good test. The volume is not low, but it is not high either. It is confirmed on the next bar with a close up. This is where you go Long. My stop would be just under the low of the test bar.

Note what happens next. price moves down and a dark WRB is formed. From that point, another test candle appears. On this test, the volume is lower than the first test, and the candle is at the same range of the first test. Again, this test is confirmed on the next bar. Two bars later, we see a No Demand sign. Not a good sign for the longs.

This No Demand is completely within the bodies of Two WRBs (hint).

But the bar that confirms the no demand sign is key. It is another large dark WRB. What is most important is that this candle (Dark WRB) closes below both test candles' lows. A dark WRB closing below the low of the test candle should trigger a trader to at least re-evaluate the long position. Note here that it would have stopped many traders out, but not all.

With the appearance of a No Demand and a dark WRB that closes lower than the low(s) of the test candle(s), we have no doubt that we are seeing No Result from a Test. Our contingency plan would thus be triggered and a short is placed on the next bar. Again, understand, these are not failed tests, they are good test with no results. Simply, we have negative action.

Negative Action: "If you observe a positive indication, but you do not observe the expected results, then we refer to this as 'negative action'...." P. 152

[flatwallet]

How would you read the following chart?