Volume Spread Analysis – Basics

Volume Spread Analysis – Basics

Volume Spread Analysis or VSA as we call is a Technical Analysis stream where we analyse the price and volume relationship to determine the movements of smart money. Richard Wyckoff introduced & invented this methodology of interpreting the price volume relationship & tape reading to understand and trade the different phases of markets. Tom Williams developed his own proprietary trading methodology and a dedicated VSA software to interpret the volume bar by bar in relationship to the price action and traders across the globe use Volume Spread Analysis as a part of their analysis combined with support & resistance, market profile, order flow or other analysis methods. Tom Williams in his work Master The Markets has described how volume plays an important part in the rise or fall of price of any asset class.

VSA is a very vast subject and like any other methods has pros and cons of its own. In this post we will discuss the Volume Spread Analysis – Basics which can be used on a normal Candlestick or Bar chart along with the volume bars in the lower pane. This is the foundation of VSA and not the entire VSA but will be useful for aspirants who want to start learning VSA and understands the basics and then move on to intermediate & advanced concepts.

Phases of the Market

Phases of the Market

Well, the phases of the market are not unknown to the traders/investors but to put things into perspective, let us start with a basic understanding of the Phases of the Market. As we can see in the above picture, the price enters into the accumulation phase and rotates up & down within a range, trying to break past the range but failing to do so and then coming back down again to test the supply and finally the smart money marks up the prices above the range to rise further. Once prices are marked up it again meets the opposite participants and the phase of re-accumulation begins. The moves similar to the accumulation phase is underway until prices are again marked up and when it reaches a previous known supply zone the smart money starts distributing. The price tries to break below but again goes up for tests. Once there is no buying pressure and the smart money is done with its final distribution, prices are marked down until a point where the smart money feels that the rices are too cheap for the asset to be accumulated again. Again the phase 1, 2 and 3 are repeated and hence the market survives.

Terminology & Difference between Richard Wyckoff & Tom Williams VSA

Although Richard Wyckoff invented VSA, Tom Williams developed a dedicated software for practical usage and filtered & modified the crude form of VSA into a bar by bar definition.

 

Terminology of Richard Wyckoff 

Automatic rally
Buying Climax (BC)
Backing upto ice
Breaking the ice
Backup to edge of creek
Critical support (creek)
First time over ice
Critical resistance (ice)
Jumping across the creek (or JOC)
Last point of Support (Demand)
Last point of Supply
Mark down
Mark up
Preliminary support (Demand)
Preliminary supply
Sign of strength (SOS)
Sign of weakness (SOW)
Secondary test
Terminal shake out (Spring)
Terminal thrust (TT)
Up thrust after distributuon (UT)
Selling Climax (SC)
Trading Range
Up thrust (UT)

 

Terminology of Tom Williams VSA 

No demand (ND)
No Supply (NS)
Stopping volume (ST)
Pushing through supply
Upthrust (UT)
Pseudo Upthrust (P/UT)
Selling Climax (SC)
Buying climax (BC)
Climactic action
Support
Resistance
Trap up/down move
No result after strong effort
Selling/buying pressure
Bottom reversal
End of a rising market
Bag Holding
Tests
Failed Test
Shakeouts
Effort to rise
Effort to fall
Sign of strength (SOC)
Sign of weakness (SOW)

VSA on a normal Candlestick Chart with Volume pane

Nifty Futures 5 minute candlestick chart

The above chart is a 5 minute chart of Nifty Futures with Volume bars in the lower pane colored on the basis of above average (Green) & below average (Red) volume.

Lets see what has happened in the above chart

1. A narrow range up bar with less than average volume showing sign of No demand at higher price
2. The smart money marks down the price with a wide range bar & volume is way above average suggesting that they will mark the price further down.
3. Just after an upbar with less than average volume, smart money again came into action marking the prices down.
4. There is no looking back as all the up bars are not able to even cross the highs of previous bar & smart money wants to take the price further down.
5. While the price was moving down, the bar before the 5 is a ultra high volume climatic bar closing in the upper middle range pointing to either a temporary pause in the fall or a reversal & the volume drops at 5 and the bar is able to close above the low of the previous climatic bar suggesting a Stopping Volume & the preceding bar is an up bar showing Sign of Strength (SoC)
6. Post the SoC it could not get demand and could not go past the lows of bar marked 4. Again the smart money marks the price down & at 6 we see the same kind of stopping action.
7. The smart money wants to make sure that supply is taken out completely. The price pushes below the low of the Stopping bar but reverses with a volume push to make a reversal bar.
8. Once the price is marked up it comes back down to test supply with volume way below average, confirming lack of supply.
9. Once supply was tested, price is again marked up
10. Ultra high volume wide range climatic bar points to presence of smart money driving the prices up  ( May turn out to be an upthrust if we get confirmation later )
11. Post the re-accumulation phase with low volume smart money again marks up the price.
12. High volume Pseudo Upthrust pushing above the high with more than average volume but closing off the lows of the bar. A test is required to confirm that smart money has no further interest in buying & they are ready to mark the price down.
13. A no demand bar and then a test confirms that price would be marked down soon.
14. Volume starts rising with price falling down confirming sign of weakness.
15. After a Stopping volume, 2 bars back, there is a failed test at 15, showing effort to rise ( If we look back we are into the zone where supply was cut off earlier & this is the zone where weak hands are trapped by creating an illusion of further breakdown )
16. An upthrust followed by high volume narrow range bars pointing to distribution. A test will confirm weakness
17. post the mark down again a Stopping volume
18. Test of the Stopping volume of 17 followed by an upbar with higher volume confirming strength.
19. Markup phase pushing above the re-accumulation range high
20. Supply being tested at the highs of 19
21. Supply being tested again with much lower volume. A follow up with an upbar wih volume will confirm strength.
22. Upthrust closing at lows confirming weakness

 This is a simple & raw example of practical application of VSA without any VSA indicators or programming.

We keep getting mails for VSA codes & Kartik Marar has made an AFL for VSA with exploration for amibroker and can be downloaded from here

What is important is the underlying concept of VSA and once we get a better understanding & a hang of it then we can shift to smaller time frame to get earlier signals of what the smart money is doing.

Apart from Kartik Marar, @Kickasstrader actively follows VSA & trades Nifty future & has coded his proprietary code for Ninja Trader.

VSA combined with PnF charts or Market Profile gives an added advantage for confirming entries & exits. When we combine it with Order flow we can get confirmation that the buyers coming at the highs or sellers coming at the lows are either emotional players who are buying or selling into the climax or their stop loss orders are getting hit.

Please feel free to post you comment and ping me on @ProAMTraider post market hours for any queries and will try my best to answer them.