[VSA] Volume Spread Analysis Part II

[dandxg 10]

Hi,

I am interested in buying TG software. At the moment I use e-signal charts.

I get the volume and the bar charts on e-signal. Are there any additional advantages in buying TG software. Also what is the latest version of the software. I am told that when the market is moving fast then the TG software charts gets frozen. Is this true?

 

 

As you know there are pros and cons to everything. TG plots the indicators, most of the time, for you, which can make it easier to spot. The problem is that it misses alot of good VSA set ups that don't get plotted for whatever reason. TG even talks about on the bootcamp video, which I own, that is very good IMO. Let me give a you a good idea. Look up this thread Blu-Ray was nice enough to convert some code the emulates a lot of what TG does for free! http://www.traderslaboratory.com/forums/46/vsa-no-demand-no-supply-and-3455-2.html#post31546

 

TG does give ppl a 30 day money back which is good, and full access to educational events, which us bootcamp only folks don't get. I just don't think it's work $2,500. Now they are charging $2,500 for the VSA symposium to teach you all of the VSA secrects, etc. You get the point. I am grateful to them for teaching VSA and price and volume, but $5k don't think so.

[heretodaygone... 10]

Another low volume test.

 

[dandxg 10]

I definitely agree. That said I have seen more than few instances where these low volume tests fail. In fact, I have seen some that punch through the low with lesser volume than than the original S/R marker on higher volume. I will try to find an example to post. It is for this reason, until someone can explain this phenomena better to me I wait for a confirmed reversal and buy or sell the first pullback on lower volume.

[Soultrader 12]

I definitely agree. That said I have seen more than few instances where these low volume tests fail. In fact, I have seen some that punch through the low with lesser volume than than the original S/R marker on higher volume. I will try to find an example to post. It is for this reason, until someone can explain this phenomena better to me I wait for a confirmed reversal and buy or sell the first pullback on lower volume.

 

What most traders fail to understand and lose money buying these tests is this:

 

1. Professionals will liquidate at the top (long positions from below)

2. Professionals will then initiate short positions at the top

3. Professionals will cover

4. Professionals will cover and accumulate

 

So there is the possibility of the first volume spike as short covering and not accumulation. Which is why I tend to wait for the second volume spike before using any kind of "tests" based setups. This is for longs only.

[dandxg 10]

I agree completely. I should have been more specific. I am talking about failed tests I have seen which are the 2nd or even 3rd retest after the volume spike, which is capitulation selling/buying or at least it appears so at that time.

 

James a request if I could? Would you consider doing some more videos on MP with VSA/PV? Those are great and the 2 methods combined are quite special IMO. Also while I am at James do you still use T and S or did you scrape it for PV/VSA with MP? Just curious as I like the video you did with tape reading that I can't find on TL now? I found it a bit easier for me to use PV/VSA than T and S, but maybe it's just me? Good trading to all.

[rsi 10]

I think we have to distinguish between low volume tests that are happening after capitulation and low volume tests without having capitulation in the background. Capitulation implies that sellers are done. So a low volume test points that there are no more sellers. If there is no capitulation in the background, the whole volume spike and low volume test (I mean the entire move taken as a whole) can be interpreted as redistribution. A failed test with this setup confirms it as a redistribution. The key point is capitulation in the background.

[Eiger 10]

Another low volume test.

 

 

This has several positive characteristics going for it, though the volume may still be a bit high. First, there is a potential Selling Climax in the background (January). Friday's price action is a spring, meaning that price has dipped below previous support and was able to rally during the day back above the low of the support. The penetration or dip below support was rather modest, so far. As noted, volume has receded. Each push push down into the climax area has drawn less volume. And, each time this has happened, a rally has ensued. Also, there was a small rally just before the spring. This is often a good sign for a spring as it is indicating the presence of some demand.

 

You can also look at the other major indices -- S&P and Dow, and see that they both are holding higher lows. So far, this is non-confirmation of lower prices by the other indicies (i.e., they are not confirming the new low put in by the Naz -- a bit of Dow Theory that can be helpful in these kinds of situations).

 

Even though there are a lot of positives, you won't know for sure whether or not this spring will lead to a new leg up without a couple of more elements (principles) coming into play. It can be still be swamped by supply. Even though volume has receded, it is still fairly high and needs to be tested. If you think back to the 5-min chart of SPY that I posted last week, you can see the same potential here. Along the tops of the narrowing trading range since the climactic action in January, you have a line of supply. SMI would call this a creek. Just like in the 5-min SPY chart, you now want to see the market vigorously rally away from the danger point (the lows) and get up above Wednesday's high on good volume. This would be a potential sign of strength and a jump across (at least) the minor creek. If we then see price react on narrow spreads and lighter volume and give a solid test, we have a pretty good chance of seeing higher prices.

 

If it doesn't rally and just hangs near the lows in here, or just drops through support on increasing volume, it has much better odds of falling lower. Either would indicate a failed spriing or test.

 

It will be fun to watch this. Remember, that this is the daily chart, and it will take more time to unfold than the 5-min chart. Nevertheless, the principles remain the same.

 

Eiger

[DbPhoenix 42]

The higher lows along with the lower highs and the decline in volume are characteristic of what Wyckoff calls a "hinge". All the major averages have been forming the same hinge and all of them have fallen out of it. While the bottoms of the hinges will likely be tested, this is not good news.

 

.

[zeon 10]

You can also look at the other major indices -- S&P and Dow, and see that they both are holding higher lows. So far, this is non-confirmation of lower prices by the other indicies (i.e., they are not confirming the new low put in by the Naz -- a bit of Dow Theory that can be helpful in these kinds of situations).

 

I don't mean to quote you out of context, so I quoted the whole paragraph in where you mentioned Dow Theory. In my early days when I wanted to become a long term trader I read some books about Dow and Rhea (I believe one of his followers). But they only mentioned confirmation of the averages: the dow industrials and the dow transports, the nasdaq never come into play. So I'm not quite sure if that "theory" can be applied to another market as well, since the nasdaq only existed since modern times.

[zeon 10]

The higher lows along with the lower highs and the decline in volume are characteristic of what Wyckoff calls a "hinge". All the major averages have been forming the same hinge and all of them have fallen out of it. While the bottoms of the hinges will likely be tested, this is not good news.

 

Although I can see this formation on the chart you posted, I don't really agree that the other major averages have been building the same formation. It looks much more like a sideways range than what you call higher lows and lower highs on the S&P. Also on the INDU I need quite a bit of imagination to see that though... you're free to post a chart to prove me wrong though.

[DbPhoenix 42]

Although I can see this formation on the chart you posted, I don't really agree that the other major averages have been building the same formation. It looks much more like a sideways range than what you call higher lows and lower highs on the S&P. Also on the INDU I need quite a bit of imagination to see that though... you're free to post a chart to prove me wrong though.

 

These were posted several weeks ago. Hinges have to be drawn in real time, of course.

 

[zeon 10]

I think we have to distinguish between low volume tests that are happening after capitulation and low volume tests without having capitulation in the background. Capitulation implies that sellers are done. So a low volume test points that there are no more sellers. If there is no capitulation in the background, the whole volume spike and low volume test (I mean the entire move taken as a whole) can be interpreted as redistribution. A failed test with this setup confirms it as a redistribution. The key point is capitulation in the background.

 

This is all relatively easy to say in hindsight, but how do you know - at that time - that the August 2007 ow was a temporary capitulation and the January low might not be one? Volume is high on both occasions right?

[erierambler 10]

The higher lows along with the lower highs and the decline in volume are characteristic of what Wyckoff calls a "hinge". While the bottoms of the hinges will likely be tested, this is not good news.

 

 

Temporarily , of course , buying has in the past occurred at this point. I'm referring to an oversold condition, without getting to much into my definition of oversold ( patterns excluded )

 

erie

[Eiger 10]

I don't mean to quote you out of context, so I quoted the whole paragraph in where you mentioned Dow Theory. In my early days when I wanted to become a long term trader I read some books about Dow and Rhea (I believe one of his followers). But they only mentioned confirmation of the averages: the dow industrials and the dow transports, the nasdaq never come into play. So I'm not quite sure if that "theory" can be applied to another market as well, since the nasdaq only existed since modern times.

 

You are right. They focused on the Dow averages. I guess you would say that this is an extension of the theory. It can be pretty helpful at times, though. And it is also a good way to view relative strength and weakness among the indicies.

 

The attached chart is the small distribution area and turn at the end of February highlighting the confirmation/non-confirmation between the SPY and QQQQ on the 10-minute time frame.

 

At A, both made a new intraday high. SPY made a new high at B, but the Cubes did not confirm, and the early afternoon saw a small sell off in both markets. Interestingly, SPY then became weaker at C. The next day it continued to show relative weakness and gapped lower, made a lower low, and then a lower high at D. QQQQ tried to go higher at D, but there was no confirmation in the larger cap index. This occured again later (not shown on this chart) and the markets sold off for 3 or 4 days.

 

Eiger

[rsi 10]

This is all relatively easy to say in hindsight, but how do you know - at that time - that the August 2007 ow was a temporary capitulation and the January low might not be one? Volume is high on both occasions right?

 

Are you going to rely on daily chart when you are trading on such a long time frame (i.e. August and January)? What is capitulation in August was on daily chart and it was a capitulation on daily chart only. You have to analyse it in the context of daily chart and the trading should be taken which is suitable to that timeframe context. A capitulation on hourly chart should be traded on that timeframe trading only. A capitulation in hourly chart may not be visible on weekly chart at all. Multi timeframe analysis is quite different.

[DbPhoenix 42]

One more or less RT clue to the possibly "temporary" character of the August "capitulation" was the one to two-day break of the demand line, or trendline. Anyone following this in RT would have noted the short, sharp move, much like a shakeout, and the quick recovery, leading to a never-look-back resumption of the uptrend.

 

And, of course, one is looking at two different trends here, one up and one down. "Capitulation" in a correction is not the same as capitulation in a downtrend.

 

 

For example:

 

 

.

Edited March 10, 2008 by DbPhoenix

[zeon 10]

Back to square zero today Somehow I can't help feeling that sometimes the market is after me. I traded a shooting star on higher volume and shorted at the next bar. I got taken out by the high, next I noticed price goingin the right direction. Typically.

 

Second trade was long after capitulation on support. Again I entered on the next bar according to plan, but got taken out by the exact low! My plan says to put the stop at the low of the capitulation bar. Normally price starts to move higher almost immediately or if it doesn't, it usually stays above the close of that bar. But now we dropped down and then spiked up again?? What the hell is going on? For sure this was a typical VSA-setup, not?

[rsi 10]

Db,

Can you provide some chart examples for explaining capitulation? Commentary as to how to look out for capitulation, how it proceeds, what to look for in capitulation etc. would be icing on the cake.

Thanks in advance and regards

[DbPhoenix 42]

Back to square zero today Somehow I can't help feeling that sometimes the market is after me. I traded a shooting star on higher volume and shorted at the next bar. I got taken out by the high, next I noticed price goingin the right direction. Typically.

 

Second trade was long after capitulation on support. Again I entered on the next bar according to plan, but got taken out by the exact low! My plan says to put the stop at the low of the capitulation bar. Normally price starts to move higher almost immediately or if it doesn't, it usually stays above the close of that bar. But now we dropped down and then spiked up again?? What the hell is going on? For sure this was a typical VSA-setup, not?

 

You probably don't want to hear this, but you are less likely to trade this successfully without context than you are with (the Joe Ross people regularly encounter the same problem).

 

All systems (and I use the term broadly) provide a piece of the puzzle. None of them are all-encompassing. With regard to your example, if you try to trade this without regard to S/R, then you will likely make a misstep. Or several. Or many.

 

Therefore, I suggest that you take what makes sense in VSA and add what makes sense in the other primary "trading by price" approaches and create something that is more catholic, preferably with as little jargon and as few catch phrases as possible.

[DbPhoenix 42]

Db,

Can you provide some chart examples for explaining capitulation? Commentary as to how to look out for capitulation, how it proceeds, what to look for in capitulation etc. would be icing on the cake.

Thanks in advance and regards

 

Traditionally, capitulation is defined as the final vomiting, when perma-bulls finally throw in the towel. However, as a concept, one can also use it many times a day for every instance in which bulls allow bears to take the lead and sell with little or no resistance from the bulls, until that point where the bears are done. Which is one reason why I find the term "capitulation" to be of less practical value to me than the process outlined -- and also detailed -- by Wyckoff.

 

Therefore, I suggest that one look at the context, which is what you suggested at the outset, and follow the before, during, and after in order to know what to do next. A capitulation is too often looked at as an event. But bottoming is not an event. It's a process.

[zeon 10]

You probably don't want to hear this, but you are less likely to trade this successfully without context than you are with (the Joe Ross people regularly encounter the same problem).

 

All systems (and I use the term broadly) provide a piece of the puzzle. None of them are all-encompassing. With regard to your example, if you try to trade this without regard to S/R, then you will likely make a misstep. Or several. Or many.

 

Therefore, I suggest that you take what makes sense in VSA and add what makes sense in the other primary "trading by price" approaches and create something that is more catholic, preferably with as little jargon and as few catch phrases as possible.

 

I take it by context you are refering to important S/R levels. But that's what I do. For example, today the long trade was on possible capitulation off support. I drew a line there because the overnight action was particulary interesting since price went sideways there for a reasonable amount of time. And price reacted heavily, as I noticed by the bar closing all the way off the lows on extreme volume. What else - in real time - was there to identify that this was not capitulation (because price is now a lot lower)?

[DbPhoenix 42]

I take it by context you are refering to important S/R levels. But that's what I do. For example, today the long trade was on possible capitulation off support. I drew a line there because the overnight action was particulary interesting since price went sideways there for a reasonable amount of time. And price reacted heavily, as I noticed by the bar closing all the way off the lows on extreme volume. What else - in real time - was there to identify that this was not capitulation (because price is now a lot lower)?

 

Not sure what you mean by "overnight action" unless you're referring to the ES. But the ES didn't trade at that level overnight (it would help if you were to include dates and prices in your charts for reference).

 

In any case, you're pinning all your hopes on a single bar that may or may not be reacting to S/R, assuming that you plotted S/R correctly. Once you're in, you set your stop and, for the most part, stop reading. Thus you're either exiting at the wrong time, like Friday, or you're not exiting at the right time.

 

As for the "capitulation", you are, as I said in a previous post, focusing on an event rather than a process. Since VSA is based -- more or less -- on Wyckoff, I suppose I would not be out of line to suggest that you consider W's scenario: preliminary support, selling climax, automatic or technical rally, test (or retest, whatever), eventual upmove, though the last may take a while. That, at least in part, is the context, not just one bar.

 

Incidentally, if you are in fact trading the SPY, you're being very smart. Smarter than practically anybody I've worked with since the tracking ETFs were first offered.

[zeon 10]

Incidentally, if you are in fact trading the SPY, you're being very smart. Smarter than practically anybody I've worked with since the tracking ETFs were first offered.

 

I'm afraid I'm going to have to disappoint you on this one... I do take trades on the SPY but I don't "daytrade" the tracker because that would require a minimum of 25k by US law and I am not prepared to risk that much money. But the SPY is the equivalent of the SPX and being a big fan of bigcharts I tend to use it as a proxy because the first provides volume while the latter does not.

 

Taking into consideration that I've been trading for almost 5 years but have yet to become consistent (although I do make profits from time to time) I doubt I'll be smarter than anybody you've worked with, sir :\

 

Thanks for the replies so far, I'll have a look at the end of the day and remember to annotate the date to my charts. Good suggestion.

Edited March 10, 2008 by zeon

[DbPhoenix 42]

I'm afraid I'm going to have to disappoint you on this one... I do take trades on the SPY but I don't "daytrade" the tracker because that would require a minimum of 25k by US law and I am not prepared to risk that much money. But the SPY is the equivalent of the SPX and being a big fan of bigcharts I tend to use it as a proxy because the first provides volume while the latter does not.

 

Actually, the monetary risk would be far less, but the other points I tried to make still apply.

[habi 10]

Back to square zero today Somehow I can't help feeling that sometimes the market is after me. I traded a shooting star on higher volume and shorted at the next bar. I got taken out by the high, next I noticed price goingin the right direction. Typically.

 

Second trade was long after capitulation on support. Again I entered on the next bar according to plan, but got taken out by the exact low! My plan says to put the stop at the low of the capitulation bar. Normally price starts to move higher almost immediately or if it doesn't, it usually stays above the close of that bar. But now we dropped down and then spiked up again?? What the hell is going on? For sure this was a typical VSA-setup, not?

 

 

Why do you use a bar chart on which you see just the high/low/close and make decisions based on candlesticks?

 

If I'm correct, you classify candle 1 as a shooting star, but it wasn't. The next two bars have a lower shadow, followed soon by a doji. Your first trade was on the green up bar, which closed near the high. Before you don't see the next bar, it looks not really weak exept the low volume on this bar. Weakness came in in the next bar (3) with the highest volume since the open. And weakness again came in, when price entered in the range of the long upper shadow on bar 3.

 

Second trade: Bar 4 (upper shadow seems not correct) is the first really sign of strenght with the highest volume since the open. All bars before closed near the low, I don't see much strenght here. I see often, that prices goes below the first sign of strenght an vis versa.

 

Look at bar 5. After the high volume bar 4, prices startet to rise just little below. On bar 5 we see already a sign of weakness because it closed in the middlewith a long upper shadow and with high volume. Bar 6 is an upthrust imho.

 

Maybe it's worth to have a look on bar 7 on the left. It closed below the previous pivot low on higher volume. The upthrust was within the range of this bar.