[VSA] Volume Spread Analysis

[BlowFish]

Tasuki thanks for reviving one of my favourite threads. I am a long time student of VSA but still have some niggles. I am about to travel so will have to be brief.

I do wonder about whether the smart money is always right or even if they 'know' a lot of the time. Often you will see a struggle going on and it is not clear who is in control (bulls or bears). There is also smart money operating on many different time frames (hence the 'fractal' nature of markets). This also makes it difficult to get a 'read' sometimes. For example if a large fund is accumulating millions over a period of a week or two you are unlikely to see this on anything less than daily bars....perhaps hourlies at a pinch.

Perhaps it dosen't matter if the money is smart or not - money is money :-) Actually if we believe that 85% volume is professional then there must be a large percentage of losers amongst those pros (35%) (certainly in futures which are zero sum).

The main thing I struggle with on a technical level is whether there is enough volume to stop a move and cause the market to go sideways/the opposite direction. Or whether it just causes a pause (2,3 or more bars 'rest'). as other pointed out the chart Tasuki posted is classic supply entering on the first bar followed by what Tom might call a 'hidden test' bar 2. I have seen very similar patterns where the buyers will re-assert themselves on bar 3 or bar 4. Now I know the theory tells us the next few bars hold the clues but often both buyers and sellers will withdraw and price will just drift only to have buyers step back in after a breather.

Another problem of course is that the open tends to be high volume anyway as the overnight paper is dealt with. I believe that was a chart of the open?

Cheers.

[notouch]

I think there's too much variety to make simplistic classifications of smart money/dumb money or Professional/non-Professional Money. In particular I think professionals are mostly active on longer time frames which is why the daily charts are useful but the 5 minute charts are fairly useless from a VSA perspective. Those people buying the recent pullback may have looked dumb for a few days but they look smart now. It all depends what timeframe you trade.

Also as I've said before I think hindsight analysis is worthless. With hindsight it's easy to see which bar in Tasuki's chart was the high volume bar. In real time though a high volume bar can be followed by a bar of even higher volume and then another one of even higher volume so you could end up selling into a rising market or trying to catch a falling knife. Only with hindsight does it all seem so clear where the high volume bar was.

[TinGull]

To a degree, I agree with you notouch. I dont think its as simple as saying "smart money/dumb money". I whole-heartedly disagree with you in saying that VSA is worthless on a 5minute chart. There are many professionals who day trade and 5minute charts can show a lot when it comes to volume analysis.

As for hingsight...just wait for the stinkin' bar to close I for sure don't want to be the first one on the train, just in case I got on the wrong one. I'd rather wait...see what volume did on that bar, and then if it was high volume, wait for the next bar to see if that volume stopped the upheaval or downward movement...whichever direction its going.

For folks that do swing trading...5minute bars will be worthless. For those that hate to hold overnight, 5min bars are very telling. Anything under that and I have a real hard time reading them. 5minute would be the lowest I would go, with a real liking for the 15minute bar.

[notouch]

Here are a couple of charts showing how VSA is great with hindsight but not so great in real time trading.

I don't think VSA is worthless on a 5 minute chart but I don't think you can point at high volume and say "that's Professional Money!". We really have no idea who or what is behind a volume spike from one 5 minute period to the next. The 5 minute charts are useful if you're looking for the perfect entry but you're getting your directional bias from the 15 minute charts. That's why I think multi timeframing is an important part of VSA.

I don't think it's necessary to try and identify who is behind a volume spike. The important thing is to recognise that reversals occur on high volume around support and resistance areas.

[Anonymous]

	Quote:	Tasuki
	Pivotprofiler, Thanks for explaining about why the market doesn't like high volume upbars (or downbars I presume)--I never got that clear in my head before. Technically, I can't be wrong if it's true (as you said in an earlier post) that 85% of the volume of any bar is professional money. On that bar in my chart, the high volume upbar, it would appear that 85% of the professionals were wrong, yes? If they represent most of the money, then by definition, most of them were wrong to go long as the market was about to retreat. I don't see any way around that. BTW, be as harsh as you like. I've got a tough hide, and there's no doubt that you're the master of VSA here. I'm just here to learn, so I throw stuff out as I see it.

First, I did not mention that it is nice to have you on board. Nice chart set up you have there. Please keep the chart examples and posts coming.

Now for the meat.

As I have mentioned, I do find the 85% idea as the only real "Leap of faith".

Now, let's look at you nice chart again. I do not know if that large volume spike candle was made due to a news event. VSA asserts that professional money uses news events to manipulate price and market direction. Suppose that there was a news event that was "bullish", well the professional buying was on the left side of the chart. The professionals would be buying at wholesale, and the large volume spike would be the bar that they sold on. They would be selling at retail. On that news event, the herd would rush in and be bullish.

So in truth, the volume surge is more likely to be the herd. The question, as always, is WHO IS ON THE OTHER SIDE OF THE TRADE?

If there was more buying on this bar than selling, then the next bar should not be down. More over, the bar after that is a Hidden Upthrust/Trap UP Move. This is a manipulated bar designed to get traders long and is a good place to short (with the weakness seen in the background).

Basically, you have to get away from the idea that large volume on an up bar is inherently bullish. You need to look at:

1. the range of the bar (spread)

2. the close of the bar

3. What happens on the next bar and sometimes even the bar after that.

Also note that there are no old tops to the left that can be seen on your chart. This is more reason to assume that the high volume is masking selling, rather than actual buying by the Smart Money.

Remember, we (VSAers) are not saying that professional money is sitting in a smoke-filled room conspiring together. We see the composite of their actions thru volume and price. So in practical terms, it is possible that some Smart money trader did indeed buy on that bar , if that makes you feel better.

One more thing:

The retail trader is now wondering if there is something to the adage: "buy the rumor and sell the fact". The Smart Money bought the fact ( while it was rumor to most) and sold the fact when it was widely known.

But this may not of even be due to a news event as I do not know exactly when this chart pic was taken.

[Anonymous]

	Quote:	notouch
	Here are a couple of charts showing how VSA is great with hindsight but not so great in real time trading. I don't think VSA is worthless on a 5 minute chart but I don't think you can point at high volume and say "that's Professional Money!". We really have no idea who or what is behind a volume spike from one 5 minute period to the next. The 5 minute charts are useful if you're looking for the perfect entry but you're getting your directional bias from the 15 minute charts. That's why I think multi timeframing is an important part of VSA. I don't think it's necessary to try and identify who is behind a volume spike. The important thing is to recognise that reversals occur on high volume around support and resistance areas.

The first thing I see on this chart are two small tops to the left that represent supply. Hence the large candle with Ultra High volume could be "Pushing thru supply". That means the volume is absorption volume as the smart money is willing to buy at higher prices. If they are willing to buy at higher prices, they must expect even higher prices.

As you have said, one timeframe is usually not enough for proper analysis.

[Anonymous]

A couple of charts......

[BlowFish]

Hey PP,

85% is not such a leap really. Even if you accept this figure the problem remains that at least 35% of those 'professionals' are goig to be wrong! Certainly in futures markets. If you asume that a few 'retail' traders are correct (even if ocasionally) then the percentage is higher.

Now this dosent matter in my mind but as you may know from my odd posts in other threads I do think it is important getting core beliefs sorted out (which includes verification I guess) and of course making reasonable assumptions based on your own 'reality'.

Actually I have rather oversimplified the argument. On any trade there can be a winning player liquidating, a losing player liquidating, or someone opening. Jankovstky talks about who is on each side of a trade in his book (reviewed elswhere on the forums I believe).

This 3 legged equation kind of makes things hard, but the outcome over time is total winning capital = total losing capital it can be no other way. If all the losers are retail then they need to make up 50% of liquidity.

Final thought - we need a better term than smart money (we might get noTouch on board then ) JAJ talks about 'order flow' (though this term has existed way before he coined it). Perhaps this is a better term to describe money entering a market on a particulear side?

Cheers,

[notouch]

Where does this mysterious 85% figure come from? We're expected to take this figure as an article of faith on the basis of what - some guy on the internet having a guess?

There's no need to guess. The information is in the public domain. CBOT publishes it's Liquidity Data Bank which divides volume into locals (Cti1), commercial clearing members (Cti2), members filling orders through other members (Cti3) and members filling orders for the public (Cti4). In spite of me pressing the point no one in this thread has attempted to identify who "Professional Money" is. But let's assume that locals and commercial clearing members represent "Professional Money" and the public are not. Let's look at 27th February because that was a big day for YM. Total volume was 2,089,414. Breakdown by group was as follows: 362,997 (Cti1), 1,023,334 (Cti2), 6,421 (Cti3), 696,662 (Cti4). We can see from that that the public made up almost exactly a third of the volume, and only two thirds was due to "Professional Money".

What is even more interesting is the breakdown between buy volume and sell volume. It's interesting because there was almost an identical number of buyers and sellers in each group. Looking at the locals (Cti1) there were 182,292 buyers and 180,705 sellers. For the commercial clearing members there were 507,547 buyers and 515,787 sellers. For the public (Cti4) there were 351,724 buyers and 344,938 sellers. So this idea of the "Professional Money" always being right and the public always being wrong is nonsense. There were winners and losers in every group.

The market is a lot more complex than this "Professional Money" controls everything nonsense.

[JustMega]

NoTouch,

I agree with you on the first part of your post that 85% is baseless. Perhaps if one gauged all markets the percentage of 'professional money' would be close to that figure, who knows. Who is to say that 'smart money' consists of those working for some big firm with an exchange seat or those with billions in capital. Couldn't smart money consist of members of the public who are informed & educated, including some on this forum, as opposed to those who blindly bet on the markets? Maybe that would bring that figure up even higher.

As for the latter part of your post..."What is even more interesting is the breakdown between buy volume and sell volume. It's interesting because there was almost an identical number of buyers and sellers in each group. Looking at the locals (Cti1) there were 182,292 buyers and 180,705 sellers. For the commercial clearing members there were 507,547 buyers and 515,787 sellers. For the public (Cti4) there were 351,724 buyers and 344,938 sellers. So this idea of the "Professional Money" always being right and the public always being wrong is nonsense. There were winners and losers in every group."...these figures show only volume. Not where the 'smart money' or the public bought or sold at. If I had to venture a guess I'd probably say the percentage of 'smart money' selling near the top/buying near the bottom was greater than for the public in general.

Moderators, no offense but I think this thread has veered from its intended subject of VSA. Maybe the matter could be continued in a separate thread?
Thanks.