(binned per thread starter’s request) Trend Trading with VSA

Volume Spread Analysis or VSA adds the dimension of volume to the analysis of price action.

Price is depicted on price charts as bars or candles. Volume provides valuable insight to the bars/candles.

Price tends to trend and is the concentration of this thread.

Trends are characterized by impulses to LLs in a downtrend and HHs in and uptrend. It is desirable to trade with-trend which is accomplished by entering during an impulse.

Trends are also characterized by corrections which are the pullbacks or retracements. In an uptrend the corrections create HLs and in a downtrend the corrections create LHs.

Pivots are the areas where price transitions from an impulse leg to a corrective leg and back to an impulse leg

IMPULSE-->pivot to CORRECTION-->pivot to IMPULSE-->pivot to CORRECTION

Using VSA to enter at pivots is a possible strategy for traders to consider.

A few easy rules for the thread:
1. Comments regarding validity of volume in FOREX are unnecessary. If this is a problem for you then move on.
2. The thread starter has no track record regarding this strategy so don't ask.
3. Posts with charts are highly encouraged. Posts without charts usually contribute little.
4. Demo (play money), Live (real money) trades, setups, etc. are all encouraged.
5. Comments regarding "in hindsight" trades or analysis are not needed. This is a learning thread and so hindsight is ok.

Hi Winston Reed (https://www.forexfactory.com/winston*reed)
Thanks for starting excellent topic, I hope I could learn from this thread, I will share my observations and my findings as discussion progress.
I believe by asking questions we can learn and discuss and get better in trading.
I think we can start our discussion for here

1. I found Volume in H1 chart is usually high in market open time. How can we take advantage of volume, Is there any pattern in Volume that can help us?
2. When we talks about volume there are many types of volume indicator, which one we should use, I some time look Better volume indicator, Better Volume indicator it has many variations too. I some time I see MT4 volume too.

Thanks, Keep learning

You are using Oanda and if you compare your chart with other brokers it so Manipulated obvious market maker


About trading volume I guess you did not hear about Market profile or VOLUME Profile ....
like they are more accurate

My only advice to you is risk management whatever style you use
Cut your loss short and let your win furether
the trend is your friend just go with it there is no expensive or cheap price in the market

For me I always risk 2 percent and the profit varies from one trade to an other as i let my winnings go up

Are you considering volume in defining trend?

What we will do if higher timeframe is in uptrend, but it is a pullback of HTF, showing as downtrend on lower timeframe (our trading TF).



It is hourly.

My ongoing trade, which is against higher timeframe (and not moving as expected, more than 3 hrs and now near 400)

Yesterday's trade


Bar 1 is last strength, closing above previous bar high closing bar (2nd) with equal or higher volume
Bar 1 is also confirmation of NS (previous bar with low volume), but next bar closed down, means test failed
SOT shortening of thurst Look at moves from 3 supports (Strength Low), 2 supports engulfed orange, 1 intact green
Moved to bar 2 is climactic, downclosing bars decreasing volume and then surge, Here I thought going long
But suddenly next bar got EvR, which closed below previous climactic bar high. If volume is surging after climax, price should move up easily.
Bar 4 is a test with increasing volume; it should be with decreasing volume. Next bar should have more volume than test, but volume decreased, likely to fail test
Bar 5 is range, mid close
Move up to bar 6 is with increasing volume, but result is questionable.
Bar 7 is no demand bar, volume dropped, price should at least go to bar 5 range

It's great to see interest in the topic of the thread. I plan to get to all questions and look forward to those with much more experience than I.

Here is a trade I placed last night. It was a sell stop below "no demand" area and I didn't feel to confident in it but woke up this am to see it already at 3:1.

I'll be commenting on it later. Here's the chart for now.

Most who have decided VSA is a worthy trading strategy are quite aware of the potential limitations and have for the most part have disregarded them. I refer you to rule #1.

The thread will concentrate on volume as it is related to Volume Spread Analysis. If you are unfamiliar with it then please read Master the Markets by Tom Williams. It is available for free so this is not a an advertisement. If you don't understand the basic concepts of VSA then you'll have a difficult time in this thread.

I don't obsess over what is the best indicator for volume. I use Oanda and its provide volume indicator. I believe it is just relative or average volume.

Opening volumes are usually high and it is in fact these volumes that can be helpful in trading with the trend. I plan to expound a bit later but here's something to ponder.

1. Trends have HHS and HLs in uptrends and LHs and LLs in downtrends.
2. Analyzing volume during HHs and HLs and LHs and LLs will be a major thesis in my own trading.

Yes Shantala. It is actually the purpose of this thread and I hope it will become more clear as the thread matures.

I'm not a big fan of multi-time-frame (MTF) analysis but that doesn't mean it can't work for some.

I only trade according to the trend on the time frame I'm looking at. I know MTF analysis is treated like religion by many but I think it is problematic.

A primary way I see traders applying VSA is to identify reversals at perceived tops and bottoms.

This often is done in the midst of a clear trend whether it is a down or up.

This often leads to the trader entering at the bottom of an impulse leg which is the beginning of a corrective leg.

This will have the tendency of the trader consistently trading against the trend (I'm speaking only of the trend that would be seen on one time frame).

Corrective legs are often quite limited and thus profit potential will be limited.

In the chart below I've arrowed from the bottom of impulse legs (beginning of corrective legs) to the corresponding volume profiles.

The point here is to emphasize the profit limiting potential of entering in such areas instead of entering at the top of corrective legs.

In contrast to post 13 this chart reveals the value of seeking trades in line with the trend.

Volume profiles at corrective tops (beginning of impulse leg) offers much greater profit potential.

This is the #1 purpose that I started this thread.

Yes, agreed.
One should look for reversal of corrective wave rather than impulsive wave.
Question is what characteristics corrective wave should have. Or just it made HHs, so we are assuming it will make HL? Where will that corrective wave will end, at HL or Spring?

The following seems reasonable:
Downtrend: LHs, LLs.
During a corrective leg or retracement in a downtrend a SOW may signal the beginning of the potential impulse or LH so SOW is what we look for.



Uptrend: HLs, HHs.
During a corrective leg or retracement in an uptrend a SOS may signal the beginning of the potential impulse or HL so SOS is what we look for.

VSA comes from Wyckoff (its just a simplified version). one of the best Wyckoff teachers (to my mind) was David Weis, he created also weis wave - which looks at the volumes in the waves (cumulative). so we have easier to see the strength or weakness of the wave. for example, if we move in the direction of the trend, but the volume decreases after each wave, we can start to look for COB (change of behavior). one of the signs for COB is we have massive vol but the length of the wave is the same as for previous waves or even smaller that shows us EvR. which often leads to a very good trade setup.

EURUSD 60 min as been trending down since about Sept 6. That is LLs and LHs with impulse legs being the money makers and corrective legs offering limited profit. This is important when we consider "taking what the market offers".

In terms of R:R, which I think is important for long term profitability, but perhaps a subject for discussion later, reward is much greater if one seeks entry at or during impulse legs.

In this chart often during LLs convincing SOS appear suggesting "reversal" but failing to deliver. (This is not an attempt to debunk any concept of VSA but rather to show that during trending we need to understand the consequences of seeking reversals at lows in a downtrend and highs in an uptrend).

In the chart below I've noted a couple of instances with the one on Sept 22 being the most dramatic.

In these instances (and in other prior instances) these high volume SOS failed to result in a sustained reversal characterized by either sustained price movement above the 20 MA or sustained HHs and HLs.

After the ultra high volume WSB (wide spread bar) on Sept 22 price managed to retrace the bar itself but never broke above its origin. It did manage to briefly trend above the 20 MA and one could have probably managed some pips via a buy.

If one insists on using MAs as a screen for getting long or short then perhaps a higher MA would keep one out of unsustained reversals. I've included a pink 200 MA which in this case seems to work pretty good. However as MAs are prone to do they will often perform miserably.

Your recent post, this whole thread really, bespeaks of the conundrum faced by most new and struggling traders who find Volume Spread Analysis (VSA):

On the one hand, they're attracted to VSA because of the perception that it "catches tops and bottoms". This is more than just a perception as VSA does often identify tops and bottoms.

But...........

On the other hand, the most appropriate way for the majority of traders to trade VSA is to use VSA in conjunction with TREND TRADING. In fact, Tom Williams, the inventor of VSA, often stated that "trends last longer than you think they will". Accordingly, that means trading like the trend will never end is the most optimal way to go.

This is why waiting for the CHANGE IN BEHAVIOR (i.e. Change in Trend) after seeing the High volume is so important. Each trader must learn to juxtapose the fact that the High Volume potentially represents the start of accumulation or distribution, but the highest probability entry is after the move in the opposite direction has begun.

In sum, most traders seek out VSA because they have a "Buy low and Sell high" mentality. Yet most traders using VSA actually benefit from "Buy high and Sell higher, or, "Sell low and Buy lower" mentality.

It's not all the newbie's fault. The highest-profile VSA trader calls himself a contrarian, but is also a self-professed trend trader. Never mind both can't be true at the same time.

Following is a discussion that I intend to eventually lead to a trading strategy that I have in my head but want to put in writing. As I develop the strategy the discussion may change.

Trends do in fact last longer than one might think. Case in point EURUSD 60 min Sept 3, 2021 to present.



We speak about "taking what the market offers". Trading with the trend is the ideal way to take what the market has to offer, however the type of trend makes a difference. To be more clear we should briefly discuss trends.

Trends occur at bar levels and at larger structural levels. At each level one can "trade with that trend". Certainly one could develop strategies to trade a bar level trend and in fact it seems to occur more often than one might think. However the concentration here will be on structural level trends. First some definitions or descriptions.

Bar Level Trend: Generally each new bar makes either a HH in an uptrend or a LL in a downtrend. Depending on one's preference a bar level trend will end usually when 2,3 or more bars break the established trend pattern.

Structural Trends

Simple Structural Trend: Involves swings or legs with HH swings and HL swings constituting an uptrend and LL swings and LH swings constituting a downtrend.
In an uptrend impulse legs lead to HHs and corrective legs lead to HLs. In a downtrend impulse legs lead to LLs and corrective legs lead to LHs. One could say that each leg is a bar level trend but this is not always strictly true but rather a generalization.



Complex Structural Level Trends: Larger trends in which the individual legs themselves are made up of smaller impulse/corrective swings.


Reward vs Risk (R:R)

Risk is the amount one is willing to lose on any given trade. Reward is thought of as in multiples of risk. So 1:1 is a trade that reward is equal to risk. 2:1 is a trade that reward is twice the risk and so on. Also note that 0.5:1 is a reward that is half of risk.

Win Rate and R:R

One's average R:R should also be thought of in the context of win rate such that the lower the reward for a given risk the higher the win rate needed to stay profitable. An illuminating exercise is to make a chart with 10 hypothetical trades of the same R:R but at different win rates. For instance at 1:1 chart each individual trade with every other trade a win. Then do the same with every third trade a win. And keep going. Then do it with 2:1 and 3:1. This will change how you see R:R. Perhaps I'll post some examples later but I don't want to get to far from the topic at hand.

Trend Structure

Trends consist of impulse legs and corrective legs.
An impulse leg makes a HH in an uptrend and a LL in a downtrend.
A corrective leg makes a HL in an uptrend and a LH in a downtrend.

Inherent Tendency of Structural Trends to Offer Higher R:R and Profit

Structural trends, have the potential to allow for higher R:R if that is something one is looking for. This potential is inherent in trends as they are prone to continue longer than thought. This does assume one intends to trade "with the trend" as that is where the higher R:R is. Conversely structural trends inherently limit R:R and profit if one trades "against the trend".

Trading with the Trend

Trading with the trend whether up or down implies one desires to enter trades at the beginning of or during an impulse leg
Countertrend trades implies one desires to enter trades at the end of an impulse leg or beginning of a corrective leg.


During a downtrend a reversal from a corrective leg is the beginning of an impulse leg that leads to a LL. This is the preferred area for a trade in a downtrend and offers the highest profit potential. It is with the trend.

During a downtrend a reversal from an impulse leg leads to a corrective leg. This is a countertrend trade and offers less profit potential.

During an uptrend a reversal from a corrective leg is the beginning of an impulse leg that leads to a HH. This is the preferred are for a trade in an uptrend and offers the highest profit potential. It is with the trend.

During an uptrend a reversal from an impulse leg is the beginning of a corrective leg that leads to a HL. This is a countertrend trade and offers less profit potential

Pivots, Transitions and Reversals

For the purposes of discussion Pivots and Reversals will be essentially the same so that as price transitions from a corrective leg to an impulse leg or from an impulse leg to a corrective leg it is pivoting in both cases and also reversing from one direction to another.

One might argue that the pivot occurs during the transition from corrective to impulse and that a reversal occurs only when a sustained trend change occurs after the pivot.

Reversals

Reversals occur at bar level, structural level and complex structural levels.

For example a structural downtrend that has been in place with multiple LLs and LHs terminates when a reversal leads to a pattern of HHs and HLs or the beginning of an uptrend.

The only relatively "sure" indication of a reversal is the development of signs of a new trend as stated in the prior statement above.

Trading a reversal without definitive signs of a new trend seems risky.

VSA, Reversals and Profit Potential

VSA offers well-described patterns of potential reversals: SOW in an uptrend and SOS in a downtrend

These patterns occur at transitions or pivots from impulse legs to corrective legs and from corrective legs to impulse legs.


Structural Uptrend: SOS signaling the potential bottom of a corrective leg offers potential opportunity to trade a new impulse leg to a HH.
Since this is with trend the need to see HHs and HLs after the SOS is redundant. Rather one can use other methods to enter after the SOS.

Structural Uptrend: SOW signaling the potential top of an impulse leg is likely to lead to a corrective leg with less profit potential. If one is anticipating a reversal to a new downtrend then proper downtrend behavior is necessary.

Structural Downtrend: SOW signaling the potential top of a corrective leg offers potential opportunity to trade a new impulse leg to a LL. Since this is with trend the need to see LLs and LHs after the SOW is redundant. Rather one can use other methods to enter after the SOW.

Structural Downtrend: SOS signaling the potential bottom of an impulse leg is likely to lead to a corrective leg with less profit potential. If one is anticipating a reversal to a new uptrend then proper up trending behavior is necessary.

Next I hope to provide support for my thoughts through historical examples.