Finding Entry Opportunity using Volume Spread Analysis

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Finding Entry Opportunity using Volume Spread Analysis in Trading

In this article, I am going to discuss Finding Entry Opportunities using Volume Spread Analysis in Trading. Please read our previous article, in which we discussed Volume Spread Analysis in detail. At the end of this article, you will understand the following pointers.

1. Finding support and resistance based on volume spread analysis
2. Testing (the most important concept of volume spread analysis)
3. Entry opportunity based on testing

Finding Support and Resistance

Risk to reward is favored when we trade from a support or resistance level. Generally, trade entry types are

1. Reversal from support or resistance zone
2. Pullback entry after some retracement
3. Breakout of support and resistance

SUPPORT

Support as the “buying, actual or potential, sufficient in DEMAND to halt a downtrend in prices for an appreciable period.” and possibly reverse it, start prices moving up again

RESISTANCE

Resistance is the selling, actual or potential, insufficient supply to keep prices from rising for a time. and possibly turn back its uptrend

How do you find support and resistance zones?

• Rejection from an area
• Flipping zone
• Fibonacci retracement

These are the support and resistance zones where we have to find opportunities for trading. Generally, trade entry types are

1. Reversal from support or resistance zone
2. Pullback entry after some retracement
3. Breakout of support and resistance

So, the support and resistance for day trading is

• Weak Highs/Lows.
• Previous Day’s High/Low
• Day high or low

Testing

The most important concept of volume spread analysis

What is testing?

• The test is required to confirm a trend.
• Usually, a successful test tells you that the market is ready to move immediately, while a higher volume test usually results in a temporary move and will be re-tested at a later time in the same price area.
• Important support and resistance points for testing include Weak Highs/Lows. Previous day high/Low and day high/low

Why do we place such importance on this action?

Let’s discuss an uptrend (all concepts opposite to a downtrend)

The test is employed to make sure that all the selling (supply) pressure has been absorbed in the accumulation phase, and this is done with a test of supply.

Many times, smart money tests the strength of either buyers or sellers. Usually above or below important reference points. As smart money doesn’t want 2 things to happen

1. If they don’t find any supply below or demand above an important reference, they are confident that the prices will move in the opposite direction of the test.
2. But if they do find it, then they usually follow through and test the next reference for the same.

Our entry decision depends on the test.

So, our entry decision depends on opening the test in this support and resistance zone.

• Rejection from an area
• Flipping zone
• Fibonacci retracement

TESTING SUPPLY (Opposite of Demand)

Rule: If there is too much supply, the market will fall. If there is no more supply, the market must go up

Testing types (DEPEND OPEN THE SUPPORT AND RESISTANCE ZONE TYPE)

1. Test in a Rising Market – Test in an up-trending market (trending )
2. Test after Temporary Weakness – Also seen in an up-trending market –(PULLBACK)
3. Test into an area of High Supply – Testing into the area of Stopping Volume or Selling Climax (reversal or absorption)

Test variation

• Single candle test
• Swing test

SINGLE CANDLE TEST

Testing supply in an uptrend

Characteristics

• In a bullish trending market
• A down bar, on reduced volume and narrow spread
• The key is the volume. It should be less than the previous candle
• Closes can be on the highs, but better when in the middle or near the high
• A successful low-volume test tells you that the market is ready to rise immediately

Entry after seeing no supply candle in an uptrend

• A No-Supply candle means that there is a lack of supply, and demand is overpowering supply, causing the price to rise in the future.
• Please note that the No Supply candle is a continuation signal, not a reversal signal.
• The background is important here, and this is only an entry to the long side if you have strength in the background, not weakness, which means it appears after bullish momentum.

1. Since we have the Bullish momentum. We can go long during an uptrend whenever no Supply Signal appears.
2. When you see No Supply with climactic action in the background, this indicates higher prices, so enter a buy order above the high of the no-supply candle.

SWING TEST FOR REVERSAL

When the market is testing supply, any down-move dipping into an area or price range where there was previous high volume (previous selling), which then returns to close on, or near the high, on lower volume, is a clear signal to expect higher prices immediately. This is a successful test. Lower volume depicts that the amount of trading that took place on the mark-down was reduced, that now there is less selling when previously there had been a lot of selling. At this point, it is important to see how the market reacts to the strength seen in the testing.

Characteristic of SWING testing candle

1. A down bar, on reduced volume and narrow spread
2. The key is the volume. It should be less than the previous two bars
3. Closes can be on the lows, but better when in the middle or near the high
4. Follows a Sign of Strength (selling climax or stopping volume)

ENTRY AFTER SEEING SWING TEST

YOU MUST have strength in the background, such as stopping volume or selling climax. Place a stop under the low of the climactic bar and place a buy order above the test bar. A test can fail, and you can re-test an area several times before the market moves up, so placing an order above the test lets the market come to you. If the test fails, you are not in the position.

Results based on testing volume

• LOW VOLUME TEST
• HIGH VOLUME TEST

If there is still too much supply, a test can fail, and if you see a failed test in a weak market, it confirms that the market will continue to fall. If the stock recovers to the high and the volume is low, it would mean that there is no supply. If the volume is high and the price fails to recover, it would mean that there is still supply present.

Low volume test

When the market is testing supply, any down move dipping into an area or price range where there was previous high volume (previous selling ), which then returns to close on, or near the high, on lower volume, is a clear signal to expect higher prices immediately. This is a successful test.

Lower volume indicates that the amount of trading that took place on the markdown was reduced, that there is now less selling when previously there had been a lot of selling. At this point, it is now important to see how the market reacts to the strength seen in the testing.

With the test now confirmed, the insiders can move the market higher to the target distribution level, confident that all the old selling has now been absorbed.

What price action should follow after a successful test?

If you are in a bearish market, you may see, at times, what appears to be a successful test. However, if the market does not respond to what is normally an indication of strength after a successful test, this shows further weakness.

Any testing that does not respond immediately with higher prices, or certainly during the next candle or so, can be considered an indication of weakness. If it were a true sign of strength, the smart money would have stepped in and would be buying the market – the result of this smart money support would be the beginnings of an upward-trending market. Specialists or smart money are never going to fight the market. If, in the smart money view, the market is still weak these days, he will withdraw from trading. The market will then be reluctant to go up, even if it looks like it should go up, because there was little or no selling on the ‘test’ candle.

High volume test

However, what if the test fails and instead of low volume appearing, there is high volume, which is a problem? This has resulted in sellers returning in large numbers and forcing the price to lower.

A higher volume test usually results in a temporary move and will be a re-test of the same price area again at a later time. This action sometimes results in a “W/M” pattern. This volume price action is sometimes referred to as a “double bottom (W)/double top (M)”. The “W” shape volume price action results from the action of re-testing an area that had too much supply before. Vice versa for the “M” pattern

Please watch the following video if you want to learn and understand How to Find the Entry Opportunity using Volume Spread Analysis in the Trading concept in a better way.

In the next article, I will discuss the Spring and Upthrust Trading Strategy. In this article, I explain how to find entry opportunities using volume spread analysis in trading. I hope you enjoy this Finding Entry Opportunities Using Volume Spread Analysis in Trading article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.