[VSA] Volume Spread Analysis Part II

[tawe trader]

	Quote:
	Thus, I must operate within the paradox that the market is relatively uncertain and unpredictable in the context of an individual trade; but over a large sample of trades, it is certain and predictable. This means that when I put on a trade, I do not have to know what is going to happen next in order to make money. What I do know is that over time with a large number of trades, the higher probabilities associated with my edge will prevail and I will make money. Therefore, it is always important to remember that being right about a trade has no meaning in my trading. Further, holding onto a bias about market direction is also meaningless. Maintaining an open mind and patiently waiting for my trade set-ups is the productive way to operate in the market. Winning trades are always in front of me. I know this because of my trading edge. It is never painful to take a small loss, and it is never a Mistake if the loss occurs as a result of a trade taken because it met my trade set-up criteria; it is just a cost of doing business. As I said, comments and ideas would be much appreciated.

Eiger,

Excellent advice, I try to trade this way everyday but it's easier said than done. Note to self - must try harder.

Trading is simple, but not easy...............which is why I presume, the majority don't make it.

I'm not sure if Marty Schwartz said the following but I have it written down in a notebook of mine, under one of his quotes:-

THE SOLE OBJECTIVE OF TRADING IS NOT TO PROVE YOU'RE RIGHT, BUT TO HEAR THE CASH REGISTER RING.

Regards
Tawe

[Seb Manby]

This evening, I am going to concentrate on the daily chart, because I think it is more intresting than the intraday chart. Today we had a down day but look at the close, it is close to the close of the previous day, but the volume is high, this tells us that there has been support at the lows of the session, also that the low of the previous bar has not been broken, this is a potential sign of strength, yes there is still supply around, but buying off the lows we should be alert. If thursday is an up day, then danger for the bears, we would be then looking for a low volume down day to follow, closing off the lows on low volume, this would tell us the the lower trend channel could be revisited, look for signs of strength as it approaches the lower trend channel if this happens. we would be back into an up trend, and the news channels will of course be well behind the curb as usual.
Non farm payrolls on Friday, this could push the market up and through the lower trend channel, after a shakeout.
There was late buying in the last hour of the trading on the 10m chart, meaning Thursday could open higher on the open.

Regards Sebastian

[Seb Manby]

	Quote:	Eiger
	Hi Mary, Welcome to the VSA forum. The close is pretty vital to VSA. We place a lot of emphasis on whether a bar is an up bar or a down bar, and this is determined by the close. Many of the VSA indications are based at least in part on the close of a bar. The 60-min chart of the ES has a few examples. The close at bar A shows that, although an up bar, the close below the middle and high volume indicates there was weakness on that bar.( you must explain to Mary what weakness is, why it appears, after all she is new and may not understand what you are talking about) The next bar is an up bar, but on No Demand.( Again, what is no demand to someone new?. i would not know what you were talking about) No Demand only occurs on up bars. Had this bar closed level or on its low, it would have a different meaning. Bar B closed on its low and is an UpThrust. It we didn't have the close on this (or any of the bars) and only had the spread, it would be difficult to read the bar. We wouldn't know, for example, that A and B were weak bars because we wouldn't know how they closed. Finally, bar C is an up bar and is a Hidden Test and indicates strength. So, for VSA the close is important. No offence Eiger, but these can be quite technical terms to someone with no experience, I remember when I first got Tom's program back in 96, I could not make head or tail of it, I just sat there watching it hoping that something would make sense. I think if you just looked at the range of the bar with volume, you wouldn't be able to read the chart. That being said, you can read the intraday market in another way, which doesn't use the close. VSA is based on Wyckoff and Wyckoff did develop what is known as the Wave Chart for intraday trading. This tracks the intraday swings or waves, and is a very helpful way to read the intraday market. When tracking and comparing intraday waves, you would be looking at support and pressure via price, the length of time for each wave, and the volume associated with the wave. I personally use a wave chart, but it is not a standard part of VSA. Eiger

Don't take offence from my post, it is not mean't to be offensive or rude, but we must consider others with less background than ourselves, in time this will change.

Regards Sebastian

[Eiger]

Hi Seb,
No offense taken at all. In fact, thanks for pointing that out. It is easy for me to slip into the technical terms and not realize others might not have a clue. And, you are quite right that this can seem very foreign when just starting with it - it certainly was for me for a very long time, too. I can see how it could be disheartening, which we don't want. I'll put together some explaination for Mary.

Also, I appreciate the daily anaysis you posted.

Eiger

[jjthetrader]

The ER2 15min gave some excellent signals for a short signal at the top today. It's amazing that the same setup came two days in a row.

[MA1]

Thank-youall, jjthetrade, Eiger, and Seb Manby for your responses. Eiger, please do not post more in response I have plenty of reading in the threads and the replies to be getting on with and I think I will find a lot of answers in there. I am very thankful for the responses you all have posted so far and will have more questions so do not want to wear out a welcome.

[Eiger]

For Mary,

First, my apology if my earlier explanation only served to confuse you. That certainly was not the intent. I’ll do my best to try to explain weakness and some of the technical terms I used. Others should join in and help clarify.

Basic Idea behind VSA

One of the unique things about VSA is that is looks at the market as a place where stock is transferred from weak holders to strong holders before the start of a bull (up) move, and also where stock is transferred from strong to weak holders at the end of the bull move and before the start of a bear (down) move. This basically means that strong holders buy at lower prices from weak holders and then sell out at higher prices, again to weak holders. This is a process that is ongoing across the different time frames and markets.

Strong holders are professional traders. These could be market makers, specialists, very large trading houses, and similar groups and individuals who are well capitalized, very well informed about the markets they trade, and who are experts at reading the market. Weak holders are often considered the public, the average trader, or the herd. These are traders who are generally not well-informed, can’t really read the market, and tend to act in unison. Because of these characteristics, they frequently enter poor positions and are easily shaken out of or scared out of their positions.

Reading the Bars & Professional Money

We want to be on the side of the strong holder, or what we often call “Smart Money,” or “Professional Money”. We do this by reading the spread, the close, and the volume of the bars, and the direction of the bars (from the close). Here is a little shorthand aid you might find useful:

• Spread
  wide
  narrow
  average
• Direction
  up
  down
  level
• Close
  highs
  lows
  middle
• Volume
  heavy
  light
  average

So, from this we can begin to talk about the bars in a common language. For example, A wide spread down bar, closing on the low on heavy volume (spread means the range of the bar, from high to low). Or, a narrow spread up bar, closing in the middle on light volume. By reading the bars in this manner, we can also follow the activity of the Professional Money.

Because of the size of their trading, professional activity shows up in the volume and the spread. Heavy volume and wide spread generally indicates that the professionals are active, either buying or selling, as the case may be. Very light volume and narrow spread generally means that the professionals are not active or not interested in buying or selling, as the case may be.

We also are always measuring the supply and demand in the market. The markets operate on supply and demand, nothing else. Supply means selling is dominate, and thus prices are either falling or are about to fall, and demand means buying is dominate and prices are rising or are about to rise. We look for the supply and demand created by the professionals, as this is what counts.

Professional Buying and Selling, Strength and Weakness

One of the important concepts to understand is that professionals only buy on down bars, and they only sell on up bars. This is exactly the opposite of what most think. Professionals buy on down bars because they are looking to buy very large quantities of stock. If they tried to do this while the market is rising (on up bars) they would put the price up against their buying, and force themselves to pay higher prices. This doesn’t make economic sense. Thus, the Professional Money looks to buy on down bars when others (the herd) are actively selling.

The same is true for selling. If professionals sold on the way down, they are causing prices to fall even lower, against their interests (of either selling out and getting a good price for stock bought lower, or selling short in anticipation of a down move). Selling on up bars (usually when the herd is buying) gives them maximum gain for stock bought lower.

So, if we want to follow the Professional Money and they only buy on down bars, then Strength, when it comes into the market, will always appear on down bars. Likewise, weakness, when it comes into the market, will always appear on up bars.

Application

We’ll take a look at the last two days in the S&P e-mini futures (ES) on the 60-minute time chart to see how VSA can be applied:

1 – On June 2, the market opened down and fell from the trading range of the previous two days. It falls on wide spread, closes on the lows on high volume. This indicates weakness or supply in the market. Because there are weak holders who took positions in the trading range over the last two days, the market is rapidly pushed down to put pressure on those weak holders who are long, trapping them and forcing them to sell into the downdraft. The next two bars are on narrow spreads and show no ability to rally. This is continued weakness.

2 – The market drops farther, again on heavy volume and fairly wide spread. This bar, however, closes off the lows, indicating some buying came into the market. The next bar is up and the market starts to rise. You can track this rally quite nicely by the closes.

3 – On this bar, we have a wide spread (compared to the previous bars in the rally) up bar. Although the bar is up, it closes below the middle. There is also a sudden increase in volume. The wider spread and heavy volume indicate professional activity. The poor close indicates supply or selling came into the market. The market has now potentially turned weak.

4 – This is an up bar, average spread, with a good close, but take note of the volume. It is low. VSA compares volume over the past several bars. As a rule-of-thumb, when the volume is less than the previous two bars, it is considered significant. In this case, it is signaling that the Professional Money is not interested in higher prices and are withdrawing from the market. We know this because of the general weakness in the background from the open, and the most recent sign of weakness we see at 3.

5 – Price tried to go higher, but immediately falls and closes on its low and back within the spread of the previous bar. In VSA terminology, it is called an UpThrust, and it signifies weakness. Note also that this is the first down bar since the rally began. And now we have three bars in a row (3, 4, 5), all signaling weakness – clear supply at 3, No Demand at 4, and a rejection of higher prices at 5. The market then falls.

6 – A very wide spread (what VSA calls “ultra” wide spread) down bar, closing on the lows on ultra high volume. The next bar (7) is an up bar, also wide spread and on very high volume. It is the combination of bars 6 & 7 that are important, as they signal buying coming into the market by the professionals. Perhaps you can see this best by comparing the bars and volume at 6 & 7 with those at 1 and the two bars that followed 1. At 1, the market demonstrated no ability to rally. At 7, the market shot up on good volume. It signifies buying likely occurred on 6 and carried over on 7.

8 – As a confirmation (in VSA we always look for confirmation), the next bar dips down and closes low on narrower spread, but note the volume. It is low. It is an early indication that supply is draining from the market.

9 – Professionals will frequently test the market, especially after the action of 6 & 7. Although buying came in on 6 & 7, there was also a lot of selling (there had to be to produce all that volume). Professionals test because they want to be sure that supply has come out of the market. If they are buying at these levels in anticipation of higher prices, they want to be sure that when the market is marked up, supply doesn’t come in and swamp the mark-up (if it does, professionals will have to buy into the rise – up bars, so to avoid this, they test the market looking for low volume on dips down into previous high volume areas). Bar 8 and again on 9 is a test of that selling. Note that bar 9 dips into the high volume area of 6 & 7. Bar 9 closes on its highs, but there is still a lot of volume, almost as high as the volume on 6 & 7. This level of volume is indicating that there is still selling in the market. This is the reason the market comes back down to the same area on bar 10.

10 - A down bar, close near the middle on above average spread, and again on high volume. The close well off the lows indicates buying (remember, professionals buy on a down bar) and tends to confirm the buying seen at 6 & 7, but there is still a fair amount of volume. The market appears to be turning bullish, but it still may need additional testing.

Well, this has turned into a bit of a primer on VSA, but that is OK as it is quite helpful for me, as well

One last thing, all who follow and use VSA owe a deep debt of gratitude to Tom Williams. I certainly do.

Do ask questions ….

Hope this is helpful.
Eiger

[Eiger]

	Quote:	tawe trader
	Eiger, ... I'm not sure if Marty Schwartz said the following but I have it written down in a notebook of mine, under one of his quotes:- THE SOLE OBJECTIVE OF TRADING IS NOT TO PROVE YOU'RE RIGHT, BUT TO HEAR THE CASH REGISTER RING. Regards Tawe

It sounds like something he would say. He wrote a great little book called Pit Bull that is worthwhile reading.

[mister ed]

	Quote:	Eiger
	Well, this has turned into a bit of a primer on VSA, but that is OK as it is quite helpful for me, as well Eiger

Thanks Eiger - great primer it is too, really helpful thank-you!

[tawe trader]

WHAT'S HAPPENING WITH OIL ????

UPDATE

Following on from my post (1269) on oil, it looks like we may have seen a top (perhaps temporary). Powerful stuff this VSA, after seeing these signals it was a good time to go short or at the very least, exit any long trades and take profits.

From high to current low it's down nearly $12 in a couple of days, I guess that is what happens when there is weakness in the background.

Tawe