Trade Using VSA (Volume Spread Analysis)

I was long there too :-(( Well the probleme is to enter long when on higher timeframe the price keeps on going lower.

But for sure VSA gives signals to look for reversal and I was sure it would go up. My mistake was that a bit later there is a shakeout turning into a very wide spread up bar. What was wrong with that bar is that it failed to break the channel and the market don't like very high volume on up bars. This was a sign to close the long trade, but I failed there again.

Daniel

Damn.... Someone just HAD to ask that! LOL

Ok, short answer ….
As I have said before, it's more art than science, unfortunately.


The long answer if you feel like wading through it ….

If Tom's theory's of accumulation by smart money holds true, then areas of price where that accumulation occurs should be discernible by the pattern of volume left behind.

Big players also set long term price goals which can be weeks, months or even a year down the road. Then they will begin accumulation to that end, over a period of time. Large accumulation doesn't take place in one bar. They also don't use a specific price for their goal but rather an area between such and such a price. They do the same with taking positions, so the idea of using a specified price as a support or resistance level is not really in line with their activities. That is not to invalidate pivots etc, which do work and do hold true, especially intraday, but are not the main focus of our efforts. Smart money does not think in 5 minute bars.

Deciphering the 'intentions' of smart money is our main focus and what VSA is all about. If we want to survive in the marketplace, we must know the intentions of those who control it. The intent of the smart money is shown by their actions. The only way we have to read those intentions is by combining volume with the price action, over a period of time. So if Tom's theories are correct, we should be able to graphically see the results of the efforts of smart money in the volume & price action, which should then provide us with the 'intent' behind it.

All big players will protect the price where they have taken large positions, something we see when large 'no touch' and other options are in play, or BOJ trying to drive the Yen down for their manufacturers & exporters, as examples. The more important that price area is to them, the harder they will defend it. No one wants to lose money, the big boys especially.

If the above holds true, then it also holds that we would expect some reaction, or defense of these large positions, which if all else holds true, would mean that a specific price would not be defended, but rather an area of price, hence 'zone defense'.

VSA is a thinking game and I find we have a tendency to spend too much of our time worrying about what type of bar we are looking at rather than trying to understand the intent's and goals of the crooks who control this game.

"Never will those who wage war tire of deception." Sun Tzu

If I am belaboring the obvious here, please forgive me.

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As far as the construction of these zones is concerned, I will try and break it down, but as I said, it is much more art than science as we are trying to understand the hidden intentions and motivations of very secretive people who really don't want us to know. Kind of like trying to catch a thief while he is planning the robbery.

I have tried for a year to create an indicator for this, and haven't been successful with it.

I only use zones as a guide, a warning if you will. Whenever I see price approaching a zone it is a 'heads up' to me.

Basically, I start with the climactic volume on the current TF, or higher, then I drill down to the lower tf's looking for the bar that had the most significant impact.

Not always easy, sometimes there are multiple Climactic vol bars within that bar. ie.... H1(current) has 12 - 5 minute bars.. and sometimes several or all of those bars will be climactic vol.

Whenever possible, I like to let the lower tf volume bars tell me what happened, and most of the time they will.

If it is a downbar, for instance, I have learned that most of the buying will occur on the bottom end of that bar, as selling on an upbar will mostly be toward the top. That information is just a guide....nothing set in stone.

Sometimes there may be an H1 Climactic vol bar that took 15 minutes to create..so after seeing that on the M5, I might have to go up to M15 and create the zone there. And, sometimes the entire H1 vol climax may have been created in one 5 min bar. Never really know how it's going to turn out until you analyze the lower tf's. Sometimes, I even find the volume on the current tf, althougth climactic, is less than the volume on the next bar, which tells me that bar is more important. (Sounds a little confusing, but you will see that happen if you start analyzing the lower tf's).

Once I have drilled down, and seen the price action & volume, then it is just a judgment call.

Another element, if you look on the M15 chart I posted earlier, there is a zone in light grey.. 4 bars in front of that is a widespread downbar on very high volume...I have learned that generally, the bars that follow have the impact, and consequently, I will use them instead. In that chart, the next bar after is stopping volume..that makes it the most important as that tells us where the bottom of price should be..(however in this case, it didn't hold), and the bar I used became the most significant bar..so as you can see, zones can sometimes be very fluid...

In that case, I could have overlapped the zones as i did with the upbar that followed...but I chose not to for clarity in the post.

If you overlap zones on the lower tf's, it is amazing how often you will find the big players coming in on the same price level at different times, sometimes over several days.. or weeks, especially when accumulation is occuring.

As to when they are no longer valid...again, a judgement call. As a general rule, if the price has penetrated and closed beyond the zone, and the volume and price action indicate it is a true move beyond, I consider it closed. When looking at the charts, it is not uncommon for price to retrace to that area later, days or weeks maybe. If it does, I will extend the zone and watch to see if it is still acting as support or resistance.

If you look on the chart I attached here, the lowest grey zone is the low for the Yen set in 1995. Amazingly enough, in November 2009, it still acted as resistance and price bounced off it. (I am not suggesting that it was a result of anything more than maybe psychological limits, which are probably more powerful than actual price.) But with that in mind, and the extreme vol of May 5, I feel based on all this, that USDJPY is on it's way up...longterm.

And as to the limits for a zone, on lower tf's I use the Open & Close most all the time. Again, if it is for instance a widespread upbar on the M5, then I might decide the true action occured on the wick and use that. I never really know if my decision was right until later, as price action unfolds.

I'm sure this is all about as clear as BP's oil but if you want to pursue this, I would suggest starting by going back a little on the charts and using the price action and vol that is obvious and easy to see, then experimenting until you develop a 'feel' for it.



I know it's been a long rambling post, but I hope it answers your question.



Sincerely,



Chief

Excellent post Chief.

I think the idea that there are price 'areas' where 'things happen' is a valid one. It can be witnessed many times on charts. I personally use WRB a la HG. I dont believe it can help you with direction but, it will certainly tell you to beware cos SOMETHING might be about to happen. You can then be vigilant for VSA signs of exactly what will happen.

Down bars on decreasing volume is indeed a bullish sign however, in your case where you have drawn your down trend line on the volume indi, you are only using 2 down bars. 2 bars are not enough to make a decision one way or the other in this scenario.

If we look at the recent background we can see that we're in a reasonable down trend and showing weakness on the wide spread high volume up bars.

If we look more recently, we can see a retrace from that 1.2650 (I think) area and a gradual fall to revisit that price. Although the last up bar is on higher volume than the previous bar, its not particularly high compared to the last 10 or 20 bars. The bar itself is in the form of a shake out and in an area where we might expect to see one.

So what does all that give us?

We have a weak reversal sign in the correct place but with no real strength in the background.

I would expect a retrace for a couple of bars then a continuation of the down trend. Or a sideways movement then fall.

I would not be trading the retrace because when the down trend starts again, it may start with a relatively sudden drop. I dont think its worth the risk however, the retrace might be a good place to take a short.

Thanks a million again, Chief.

I noticed that may time these High Volume areas are penetrated by low Volume bars. Some say that lower Volume bars will make it bounce on a Higher Volume area. I assumed that was reasonable, so I get confused when it does not. There could have been short covering going on in the previous HV area, but no way of telling.

Other ideas are that only just a few bars around the significant HV bar are relevant, as is used in formulas like Stopping Volume and NoDemand bars

Do you have an idea when a High Volume area will be broken, or when it holds ?

Cheers,

Dutchy

Hi Chief,

thank you for your extraordinary reply. Definitely a best-of post. I will look into this technique along the lines you have drawn and experiment with it. It seems to be a way to define areas in which to look for trade signals more precisely, compared to the supply/demand delta zones created via WRB analysis, which often tend to be quite large.


Regards,

Wolfgang

Happy Trading week , Everyone..

i swear, the bears have been F**king with my accounts all week..

Wow , did hiddenGap really leave ? That sucks..!!

Friday was all about watching price action and correlation of indexes,

That stopping volume you saw on euro was seem on gu and oddly aj on the massive down bar BUT as es tried to close the gap the fx pairs hardly moved , indicating that the bullishness of the us market ( for the 1st 30min ) was not mirrored in the fx market.

also if you entered on one bar of stopping volume you are using vsa wrong anyway ..... what you should have done is look for further signs of strength ( low vol down bars or shake outs)

thanks for the view on friday!

A

Dutchy,

Zones are penetrated regularly. They are not a solid wall by any means, but merely an area we need to be aware of when price approaches.

If a zone is penetrated it can be for several reasons....

..... the market has changed their view on the trend or price

..... momentum has carried price beyond the zone, now it is retracing on the reversal

..... it was an area of short term S/R

..... it wasn't an area of true importance to start with

..... or, we just got the zone wrong

If an area of previous high volume is penetrated on increasing volume, one can assume with some confidence that the market is interested in prices continuing and that area is no longer acting as S/R.

If volume is declining as it approaches one of these areas, we can surmise there is a declining interest in the price as well, and the area may continue to act as S/R. The only way we know is to watch price and volume to see if it is rejected.

Quite often price does penetrate an area during periods of low volume, but this usually only indicates a thin market and no one of importance is really concerned about the price, or as Dr. G pointed out in one of his posts, it may be junior traders allowed to play with the market. We really don't know.

Ultimately, they are only another tool in our 'toolbox' to help us determine what the market will do next.

I would caution about being 'disappointed' when something doesn't happen the way you think it will... the market has a mind of it's own, and will do what it wants, when it wants... kind of like a spoiled child. If you marry an idea.. you will be looking for a divorce everytime!

The great thing about getting old is ... apathy... I don't have any expectations... I really don't care where it goes.. I just know that it will, so I just follow along and try to take a few along the way.

Hope this helps some,

Chief

looking for further weakness ... supply hitting ,market on up move

Your'e welcome, I hope it helps.

Enjoy the experimentation. I have every confidence that you will learn a great deal from it as well.


Chief

Hi,

In VSA, a no-supply bar is a down-bar with a volume lower than the volume of the 2 previous bars. But in some cases, a no-supply bar can also be an up-bar. It can be the same for no-demand and tests.

Well, an up-bar with a volume lower than the volume of the 2 previous bar is in fact a no-demand bar.

How do we know if we have a no-demand bar or a no-supply bar that is actually closing on the high?

Daniel

Notifications will start going out later today. There are quite a few people signed up for them so if you don't get yours, check your spam box first, if nothing is there and you did sign up at the link on the first post then give it some time.

PS Hiiiiii. Hope you guys had a great weekend.

oops..

I just deleted my spam folder. I hope it was not there already. Sorry about bing inactive...busy life for day trading

Not sure where you're coming from Dan. A ND is an up bar and a NS is a down bar.

Don't forget that polar bears don't live in hawaii. If you have weakness in the background and are seeing reversal signs then, you'll be looking for a ND. If you see what looks like a NS just ignore it.

Looking forward to it Shamus.

from a 2nd grader to all those in kindergarten--

it is difficult to get your head around VSA at first. even after you start understanding some of the clues to why price moved a certain way, it still remains a mystery sometimes as to why a move happened. i am always learning but after a lot of study here are some principles that have helped me get up to speed, like 'training wheels' on a bike.

i wasn't really getting it until i put the VSA principles into my own language. here is a taste of how i think about it.


PRINCIPLES - these 2 principles are related and kind of overlap into one

A. ALTERNATION. bulls & bears take turns like 2 teams in a ball game. I'm surprised i don't hear this analogy more often. this plays out very clearly on every timeframe. the key thing to look at is, what did the bulls manage to accomplish on their turn, and then how far did the bears get when they had the ball? If you follow 2-4 turns you start to get a feel for the relative strength of each 'team.'

Implication- When the candle colors alternate, each 'team' hasn't had enough of a chance to show it's stuff...not enough to give a clear indication of its strength/weakness. All that happened was that the other team got the ball. that doesn't tell you anything in itself. Making predictions from these areas is rushing it in my opinion (until you have more experience with candle spread, etc).

Application- If you are overwhelmed trying to read VSA, start by sticking to 1 timeframe and ignoring all alternating red & green candles. Cross them out or whatever. This will help eliminate unclear areas where there is no clear trade. Look only at the obvious areas where each team has had a chance to develop the move, i.e. at least 2 same-color candles in a row. The signals are clearer here because you can see the reaction to the team's first candle/first move. Much more reliable, much less of a guess. Especially helpful in those hard-to-read trading ranges.


B. CONFIRMATION. This is really just the inverse of the above. In the spirit of these 'training wheels' principles, for now, instead of trying to understand buying/selling pressure from one candle (like a test bar in a trading range) instead WAIT for another candle. Forget about getting meaning from things like test bars on their own, because this is too confusing at first. Just wait for another candle. And wait again if you have to.

Implication- As I interpret Tom W, it is much easier and more reliable to read supply & demand by looking at reactions to price's attempts to move rather than trying to read it all in one candle. i see a lot of misinterpretations of buying/selling pressure on charts in this thread that seem like guesses based on the meaning of 1 candle. What was the REACTION to that candle? The meaning, as Freud would say, is not A or B but lies between A and B--in the relationship, the movement, the invisible part. Within this interpretive area you will find an understanding of the current pressure of supply vs demand, thus creating market insight that will allow you exploit this information for your own gain.

Think of it like this, if 1 ball team had a great run and scored, but you hadn't seen the other team perform yet, why would you place a bet on the game? The other team could come in and kick even more ass. Later, as we get better at this we may be able to read the signs faster. But for now, wait for confirmation. KNOW where the supply/demand pressure is before getting in. If you feel like you are guessing, wait another candle and judge by the relationship between them instead of looking for a 1-candle signal.

There is no sense in acting on what is largely a guess. stabbing and punting just creates difficult trade management situations, emotional drama, and does not encourage a frame of mind of clear decision making. Less is more

Application- Mark up your charts highlighting only confirmed areas of supply/demand that you can read from 2 or more candles. If you aren't sure what's going on in a particular area, do not guess, just keep going. Look for 2- candle moves-- for now, stop looking for a 1-candle signal. Stop trying to interpret VSA from every single candle.

Imagine if you only traded when you were very confident in your supply/demand reading, and ignored all of the nebulous areas (which is most of the time for newbies like us) you could achieve a high win rate and keep yourself out of a lot of heartache trades. Work towards a time when you take action only on a 'sure thing'.


CHART EXAMPLE: [i just chose a more or less random historical chart area]

The very subtle blue/yellow/red shading on my chart corresponds to the London/US/Asia sessions, respectively. No matter....I'm 95% confident in saying that these principles apply in all markets, even slow Asia times.

 

1. very high volume down bar, closed on the low. mkt is obviously weak.
2. bulls had 'the ball' for 3 bars. what did they accomplish? A lot of buyin & selling in these bars--a lot of profit taking, but even if you don't see that, just look at--3 feeble bars (similar to '3 advancing soldiers' candlestick pattern) on lower & lower volume. not much field advancement for the bull team. expect more downward action.
3. this is the crowd in this area, because volume is lower now vs. the #1 move above. Shadows/wicks are growing. All you know from this is that the bears are getting tired. Change your bias to start looking for longs but no entry signal yet (a trading range could develop)
4. price started moving up, and at this point bears have the ball for a moment. now look at the NEXT candle--the result of the bears' effort was a bull candle, closing on its high, on slightly higher volume. hmm Bears are very weak. they lost the ball after 1 candle..
5. the area of previous resistance. you'd be looking ahead of time for something to happen in this area. in this case we see a bearish engulfing candle with a good-sized upper wick. this gets followed by another bearish engulfing with a lower top, which trades to the next pivot point (just below yesterday's high). but i digress from my point here.
6. If at candle #6 here you are not sure if this is a lower-spread up move on lower volume (crowd reaction type of bar) then just wait another bar....
7. ...Now we have 2 green candles in a row so we can make a more informed bet on the game. it is this candle, not #6 that more reliably shows that the bulls have lost it. after all, they just had a nice run up, then it slowed at candle 6, and now even tho they already had the ball (this is the 2nd green candle in a row), price went essentially nowhere.
   
   Maybe the more experienced VSA'ers here wouldn't need this extra confirmation, but doesn't it feel better to have it? isn't the signal much more obvious? Instead of guessing and having your stomach do cartwheels while you wait for price to go your way confirming your entry (no way to trade), waiting another bar brought us clarity, confidence, and kept us in a more relaxed frame of mind (which i hear is important in trading : )
8. This chart doesn't have a great example of alternating red & grn candles but look for this principle in a trading range such as this mini-range here. Try completely ignoring the two small candles i've noted in this box, the ball got passed to the other team, and again. nothing else happened. Wait for...
9. ...Candle 9 is a tiny-candle on tiny-volume AFTER the bulls already had the ball. They had the ball and look where they took it, nowhere. Ball will turnover to the other team now... Try this yourself in other trading ranges. the alternation principle is particularly helpful in very slow markets and trading ranges, since there are usually so many alternating red & grn bars. try ignoring them.

I am trying to show you a way of thinking that helps me filter out a lot of 'iffy' signals and stick to the more obvious ones, while getting a feel for how the market pressure is playing out.

All of this may give you a better idea of how the game is playing out... but i wouldn't trade on these principles alone unless you have an idea of the background pressure. If Smart Money decides to mark price up through a trading range, you may be able to see it coming by 'following the game,' but a this kind of big move out of nowhere could still take you by surprise.

I personally like to work this by looking at higher-timeframe charts FIRST, i.e. doing a top-down analysis starting with the daily and looking for signals on H1 that are in line with the D1. Try starting with a higher-TF analysis then drill down. If you went carefully candle-by-candle on the higher TF using the principles above, ignoring every area on the chart that doesn't make sense, then did the same for the H1, i am sure you would find at least a few VSA signals that call out to you. really this is all you need....

For me things became much clearer when i stopped trying to look for VSA signals in every candle, and just let the obvious ones pop out. Trust that you will be able to see more in the chart over time as you gain more understanding. But don't force it and don't take action on 'guesses' - take only the most obvious trades.



I know this is wordy and might be hard to follow, but i hope it helps someone. lmk if i can clarify anything.

good hunting
mark