Trade Using VSA (Volume Spread Analysis)

Given the result it should not be correct :-(

If we enter short at the top at 1.2453, is it possible using VSA to avoid exiting all along the down trend?

In Wyckoff Schematics it is written that at the beginning of an accumulation phase, there is a Selling Climax (defining the bottom of the accumulation channel); then it is followed by a rally, defining the top of the channel and then it is followed by a test of the support level.

This is only the first phase of the 4 accumulations phases described by Wyckoff, but for VSA, a successful test is a sign of strength and an entry signal.

How can we know if it is a test after the selling climax at the beginning of the accumulation phase or a test at the end of the accumulation, just at the beginning of a rising market?

Daniel

Hello everybody! There is some thoughts on accumulation and distribution from one trader:
"Techniques of Tape Reading - Accumulation and Distribution


There are actually two types of accumulation/distribution scenarios. We have labeled them passive and aggressive. Let's go over the basic principles first:

Accumulation of a stock is when the volume ratio is leaning more to the sell side, but the price does not decrease. This shows a support level. Distribution is simply the opposite. The volume ratio is more to the buy side, but the price does not increase. This shows resistance. In TA terms, you see this on a chart where price bars/candlesticks derive the t/s data and turn it into a visual of bodies and tails. In TR terms, we are watching action with the rate of change in volume and price as it moves in a desired direction. Those of us that are true tape readers are then able to remember not only where these areas are, but we are also able to remember the difference in action as the stock makes a test or retest into these areas.

For example, the first test of a resistance shows slow buying into it, whereas the next test shows a bit stronger buying into it. Things of this nature take us more into the action of the stock as it's happening and a bit harder to see on a visual representation in TA terms. This is why I like the complementary styles of TA and TR. Both teach the principles that help to define more confidence in your system and fills gaps in each other's systems. Since we have basic principles of accumulation and distribution, we can figure out how the minority and majority act.

Knowing that the majority usually is on the wrong side, it's important to understand what the minority is doing in each of these scenarios in order to participate with them, in a manner that we are ready to unload any position to the majority as we see them participating more. Much like when we exit position into price/volume spikes.

First, let's go over what the majority believe about accumulation and distribution. Unfortunately, this belief is far from truth as it acts as a theory for why the market works the way it does, but a theory that is far from reality. Many try to apply the idea that: The market likes to drive prices down to "accumulate shares" at lower prices. This can be the famous "they" or the specific "MM", neither of which holds any special meaning to a professional trader. We know the market works in a manner that hurts the majority because the majority tends to be simplistic and lazy. Thus when things go against their thought, there is blame to be placed. Our sense of accumulation does not have to do with the "whys" or theories, it is simply based on the fact that "this is what I see and it's happening regardless of why". Let's talk about accumulation.

Two types:
1. Aggressive (normally when we see a slow uptrend that is unassuming as some group or company or firm is trying to establish a position not alerting the public to it until they have the full position filled).

2. Passive (normally seen when a stock makes a sharp move after such events like capitulation where the smart money begins to support the price but not with the same intentions that we see in aggressive accumulation).

You can say one is for the rebound while the other is for establishing larger positions.

In aggressive accumulation, you often see one or possibly a few major players on the issue. They can be as apparent as their own MPID (Market Participant Identification) or they mask the intention using an ECN such as INCA or BTRD. This type of accumulation is marked by slow steady advances (sometimes some nasty pullbacks are apparent depending on liquidity issues), but for the most part, most selling is absorbed aggressively by these participants. Slow and steady therefore does not draw attention to the public as the public is mostly going for stocks that are moving up and down in a volatile fashion to trade.

This unassuming nature and lack of attention to the stock being accumulated, allows for larger positions to be established without much risk of having to pay higher average prices in acquiring the full lot. Quite often, to mask the appearance of accumulation, the MPID will go on the ask selling shares to cap the upside move at certain intervals if he feels maybe it's getting out of hand. Of course he runs the risk of it continuing higher while he tries to sell, but this is the game we play.

The main theme continues to be: How can I get my full lot filled while not drawing attention to it.

This is their entry strategy.

What's the exit strategy? We talked about this already. When the public finally figures it out and begins to hit the stock with major buying. This is the area that the minority who has been accumulating shares during the time period the public wasn't aware, begins to distribute all they want.

This whole scenario shows the MPID wants to establish a position but doesn't want to tip its hand. He slowly buys the stock absorbing the majority of the sell volume creating support levels. He may have a few tricks along the way to try and spook us, but this is not a conspiracy, it's his job to get the best price for his full position. Finally when the public begins to see a stock climb, it gets hit with buy volume, creating price and volume spikes. This is the area the MPID wants to begin unloading some or all of the position.

Passive accumulation is the opposite scenario of activity. In this case, we have aspects like a fast selling event. This shows that the majority is already participating and most scanners and filters have picked it up. This draws immediate attention to the stock from wider audiences. So there is no way to establish a strong position as the time period for many of these rebounds doesn't allow a lot of liquidity to get a large position. Most of these moves are displayed with a fast drop, then quick bounce.

Now, this is passive for that very reason. The MPID is not necessarily looking to establish a huge position. He is simply playing the overreaction of the crowd. This is the example of the minority taking the opposite side of the majority (sell side in aggregate) and going long once that selling gets exhausted. You and I are able to participate with this passive accumulation when we see the scanner pick it up. As we also look for that pivot where selling seems to be exhausted, we establish our risk and then go long. On aggressive accumulation we are looking at something that is not as clear and is often harder to see (which again is what it's supposed to be or else the public ruins the accumulation)

Passive accumulation is easy to see. Panic selling brings us to it. Aggressive accumulation is not as easy and we often have to watch the stock a bit to assess which MPIDs are doing what before making a decision. But the characteristics are there:

Passive: Fast drop and looking for area where it gets exhausted and look for long...using that last low as support level.

Aggressive: Slow uptrend, strong absorbtion of selling by MPID that is major player and many times volume increases more on average from the previous day's trading as they continue to increase their position and more and more are catching on to the trade.

Okay, let's move onto distribution. Again, the basic principle is that large buy volume with no increase in price marks distribution and a resistance level. However, again we have two types: Passive and Aggressive.

Aggressive distribution is often marked by strong absorption of the buy volume on the sell side. The firm or MPID is taking a short side position for whatever intention. Either from a technical standpoint or because this is an area where it best fits his intentions for his position or whatever. Maybe there is less competition for him to sell at this level versus a level higher as he sees it. We'll never know at that point in time what the true intention is. For whatever reason, he is doing the opposite of our accumulation scenario. He doesn't let the price drop. In this case, he doesn't allow for price to rise.

His risk is that there might be an overwhelming demand that he has to cover. His reward is that he is able to establish a position on the short side in a manner that doesn't bring in the public that will drive the price lower, forcing him to sell lower and ruin his cost basis. As the stock falls, the slide is normally slower with previous resistance becoming lower and lower, establishing that downtrend that eventually the public picks up on.

What happens next is that traders see the setup on the short side and sell the stock. Those that are long eventually get to a panic phase (capitulation) where those that are short from higher levels are more than happy to buy, covering partial or all of this short position. And at this point, we have possible passive accumulation again. See how the cycles begin to work together?

Passive distribution: Stock brings in the strong majority buy volume and those in from lower levels (minority) are now beginning to sell shares to the majority. At this point: institutional support is no longer there because their accumulation and established position from lower levels is gone. Now it's time to distribute to the public. If no institutional support is there anymore (MPID support gone), then the stock has a greater probability to fall. At the time of this spike, this is where buying becomes exhausted and distribution hits the stock and this marks our resistance level. This is again is where the majority is participating and no large unassuming positions can usually be taken by MPIDs and therefore is passive. They are distributing enough shares to alleviate accumulated shares from lower levels. And they are not establishing a large short position, rather alleviating positions they currently have from the long side.

So how can we use this?

In aggressive accumulation we are able to identify the beginning areas of stronger moves and add bigger positions as the stock moves in our direction, waiting till the public figures it out and unload our position to them. In passive accumulation, we are able to play for the rebound much like in our capitulation alerts.

In aggressive distribution, we are able to go short and look for trend continuations allowing those areas of faster selling to let us partial out. In passive distribution, aggressive shorts can look for a scalp short and long side traders can look for pullback entry.

I often find that shorting price spikes is a bit more risky due to the fact that if distribution is light and resistance is broken, we now have short covering and long side buyers hitting the trend continuation signals often leading to some strong slippage. Over the years, I have seen some real ugly ones, jumping .50 to 1 before traders could get out. Times have changed a bit, but the principle is the same and a reason that most of these "euphoria" alerts are for faster profits on the short side.

These principles of accumulation and distribution that I described show you how the minority think and how the majority thinks. You must be able to see the difference in why we act the way we do in order to progress using these principles that illustrates the minority acts against the crowd and can profit greatly from this understanding."

Christopher Schumacher is the CEO of GST Capital Group and a private trading mentor for RealityTrader

V_2008 could you post some examples for forex?

here is the result of this chart...
http://www.forexfactory.com/showpost...postcount=7054

personally I think we need to have more open discussion @ acc/dist and how different traders use this info..and what they see off the charts...

es seems to be ending on a no demand day at resistance 1100

lets see what Tuesday brings .. 1085 is key level ( markets closed Monday)

Congrats Shamus on your 500th page

ok ... those who asked if TG is any good .

we know we are seeng overall a no demand forming in daily es at key resistance , so on move back to 1100 before close i was looking for any sign of weakness on a 5 min . Sure enough Tg printed a supply hititng market at 1099.5 , sold 1098 closed 1085 , all in 30 min lol

will post a chart later

weakness on daily ES is still there on this effort to move up

15 min charts rock on eu and 10 min on es...

here is that play before huge drop.... any vsaers would not have been caught long

brilliant, just brilliant! thanks!

On the chart below, how do we know that it is absorption of selling (passing accumulation) instead of aggressive accumulation?

How do we know that there is a strong selling and it is absorbed? Where can it be seen on the chart? Couldn't it be simply buying without selling?

Very nice Malcolm! As usual but thank you for posting..it really doesn't get much more explanatory than that. Nice end to the week/month too for you huh?

Take care and have a good weekend all,

Donnie

looks like major weakness to me all up moves being hit with high vol

Up-move with high volume is strength!! Why is it weakness here?

man I wish I knew the page in master the market for this one ... so i will give you an example

think of it like this pros buy into weakness sell into strength

here is euro charts with those ultra high volume up bars as you are showing in that chart ... look what happened.

These are called buying climaxes and if they knock market sideways are a major sign of weakness

that stock jetform is not real . I looked for it lol .....esignal could not find it

But on my chart it 's not buying climax. The trend is going down before the first up-move.

I'm lost!!! :-(

Have you ever consider what the Up-move with high volume for ?

If not so,why don't you read this thread from the first page before annoying our master?

I'm just a newbie, please correct me if i'm wrong.
From my point of view, the high volume up bar was the SMART MONEY action to push the price beyond the resistance at 1.2390 but the up move stop by another resistance level at 1.2440.

I don't want to annoy anybody. That's precisely because there are VSA Masters here that I'm asking. But sorry for that. I wont ask stupid questions anymore!!!

Sorry for my previous comment,

But read carefully his answers, there are lots of hints to correct your misunderstandings.

for example he wrote

[quote=think of it like this pros buy into weakness sell into strength[/QUOTE]

Regards,