Volume Spread Analysis in Trading

Volume Spread Analysis in Trading

In this article, I am going to discuss Volume Spread Analysis in Trading. Please read our previous article, where we discussed Volume Price Action Analysis in detail. At the end of this article, you will understand the following pointers.

  1. What is volume spread analysis?
  2. How to use volume spread analysis in trading?
  3. Market structure with respect to volume spread analysis
  4. Volume spread analysis
  5. Selling climax
  6. Stopping volume
  7. How to trade based on selling climax and stopping volume?
MARKET STRUCTURE With Respect To Volume Spread Analysis

Lets understand bullish trend formation. Bearish trend turned to bullish trend

Price goes through 4 phases. These are
Phase A. Stopping the previous bearish trend
Phase B. Construction of the cause.(accumulation)
Phase C. Test for confirmation (testing supply after accumulation)
Phase D. Bullish Trend out of range.

MARKET STRUCTURE With Respect To Volume Spread Analysis

We will come this market structure later. Just understand the overall concept

How to analysis volume activity in chart
  1. Through volume price action(VPA) (discussed in previous article)
  2. Through volume spread analysis(VSA) (we will discussed in this article)

Let’s understand how to differentiate different types of volume like

  1. Average volume
  2. Below average volume
  3. High volume
  4. Ultra high volume

Now we have four type of volume. Let’s find out in chart

Volume always moves in cycle.

Rule -: You can visually compare Mountain Peaks to identify volume peaks structure. The key is to understand the structure of the peak clearly. Volume peak has following characteristics:

Rising Volume — Peak (Highest Point)— Falling Volume

How to analysis volume activity in chart

Average and Above Average Volume: Above Average Volume is the Highest Volume in the current session which is higher than the average volume but it is lower than the previous peak Volume. Average Volume is the volume that coincides with Moving Average 20 of the volume indicator

High volume and Ultra high volume: high volume is volume equal to previous pick volume. Ultra High Volume is the Highest Volume in the current session. It is higher than the previous peak volume.

How to use volume spread analysis in trading

Bearish and Bullish Volume

Bearish Volume is marked in Red and it shows bearish activity. Bullish Volume is marked in green and it shows bullish activity. If demand volume greater than supply volume then overall bullish volume

Bearish and Bullish Volume

What is volume spread analysis?

VOLUME SPREAD ANALYSIS (VSA) in Trading

In volume spread analysis few facts which we are required for chart analysis. These facts are:

  1. price movement,
  2. volume(the intensity of the trading)
  3. the relationships between price movement and volume (harmony or divergence)
  4. the time required for all the movements to run their respective action
Components of volume Spread Analysis:
  1. The Volume (i.e. activity),
  2. The Spread (i.e. range of the price bar)
  3. The Close (the closing price of current bar)

Spread: Spread is the difference between Opening and closing of the price. See the diagram below for further illustration.

Volume: Volume is the activity of the frequency of transaction of the price change during a specified period of time.

Close: Close price tells us where the balance point at the end of the period.

Components of volume Spread Analysis

Upside move with respected to volume
  1. Smart money has no interest in the upside – Low volume.
  2. Smart money are selling into the public buying – Higher volume.

Upside move with respected to volume Upside move with respected to volume in VSA What is volume spread analysis?

ow to use volume spread analysis in trading

Read part1 and part2 for better understanding

SIGN OF STRENGTH BASED ON VOLUME SPREAD ANALYSIS

Re call the market structure that we have discussed above

SIGN OF STRENGTH BASED ON VOLUME SPREAD ANALYSIS

Sign of strength means. The stopping action of down trend

Phase A. Stopping the previous bearish trend (sign of strength)

Again recall the volume interpretation

• Smart money has no interest in the upside – Low volume.

• Smart money are selling into the public buying – Higher volume.

  • Ultra high volume-the classic trap of “Smart Money

Now we have found two important rules for volume spread analysis

  • Rule Number 1-‐ Weakness appears on an Up candle. Supply when it comes, it comes on an up candle.
  • Rule Number 2-‐ Strength Appears on a Down candle. Demand when it comes, it comes on a down candle.

Some volume spread analysis that suggests the end of down trend. These are

  1. Selling climax
  2. Stopping volume
  3. End of falling market

Now we will discussed these 3 pointer

What is selling climax?

This condition marks the end or the approaching end of a particular downtrend. This panic selling by retailers (or public) creates an extreme expansion of the price spread and an expansion of the volume, this action may occur over one day or over several days.which is matched by buying (demand) of:

  1. experienced smart money
  2. large interests
The classic characteristics of a selling climax:
  • There must be trend to reverse. (after a significant extended down move on the time frame of interest )
  • Trend will accelerate to downside with wide spreads down closing in the middle or high
  • Volume expands dramatically
  • Often occurs one more than one bar
  • Must be tested for entry

The classic characteristics of a selling climax:

What is selling climax?

A selling climax is generally followed by a secondary reaction why?

Two possible outcome after selling climax

  1. Either the professional money is BUYING into the SELLING [see end of a DOWN market].
  2. There is a trading range OR technical support level to the left and .(trend continuation)
Let’s first understand for trend continuation after selling climax

If buying during the Selling Climax was principally for the purpose of supporting prices temporarily and checking a panic, or relieving a panicky situation, this support stock will be continue after a technical bounce from support .if price supply sufficiently to drive prices through the lows of the climax day and bring about a new decline, that is, a resumption of liquidation.

A selling climax is generally followed by a secondary reaction why?

Trend reversal after selling climax

After a technical rally, if prices test climax low with volume decreasing and hold around or above the climax lows, then we have an indication of support and the completion of liquidation. This tells us that there is no selling pressure or no Supply, (i.e. no more sellers) an obvious conclusion that the market is going to rally as shown in the right side of image

If the testis successful, we can expect higher prices, especially if the test is on low volume and narrow spread down bar into the same area where you first saw the very high volume. This is a strong BUY signal.

Time To Buy The Market AFTER TEST
  1. Look for selling climax
  2. Wait for successful test(lower volume and narrower spread)OF selling climax day low
  3. Any reversal candlestick pattern(like engulfing or outside bar or pin bar)
  4. Buy above that candle
  5. STOP LOSS below the low

Time To Buy The Market AFTER TEST

How to trade based on selling climax and stopping volume

Selling climax

Stopping volume

What is stopping volume?
  •   To stop a down move and  demand has to overcome the supply
  • It is the volume of the smart money coming into the market and stopping it falling further
  • What is happening is that the weight of the selling pressure has become so great at this point, that even the smart money moving into the market have insufficient muscle to stop the market falling in one session. It takes two or three sessions for the brakes to be applied and is like our tanker.
Characteristics of stopping volume
  • Demand overcoming supply
  • Occur after an extended down move
  • Volume expand significantly
  • Bar close mid or high and body narrow (lower shadow)
  • Often occurs one more than one bar . first bar close may low 2nd bar close mid or high

What is stopping volume?

Two possible outcome after seeing stopping volume

If the volume had represented SELLING, how can the spread be narrow? There are only two possible outcome for a narrow spread DOWN-day on very high volume.

  1. Either the professional money is BUYING into the SELLING [see end of a DOWN market].
  2. There is a trading range to the left and the professional money is prepared to absorb the buying from traders from support region.
Trend continuation after seeing stopping volume

This topic will covered in next separate article

Trend reversal after seeing stopping volume

After seeing stopping volume .If the ‘test’ is successful, we can expect higher prices, especially if the test is on low volume and narrow spread down bar into the same area where you first saw the very high volume. This is a strong BUY signal.

Trend reversal after seeing stopping volume

How to trade after see stopping volume?

Time To Buy The Market AFTER TEST

  1. If the day closes on the lows, you now have to wait to see what happens on the next day.
  2. If the next day is level or up, this must surely show buying on the previous day as well.
  3. wait for the market to come back down into the area of stopping volume on LOW VOLUME narrower spread
  4. The time to buy the market is when we begin to trend up As the trend begins .Any reversal candlestick pattern (like engulfing or outside bar or pin bar). This shows us that there is no sellers or no Supply
  5. Buy above that candle
  6. STOP LOSS below the low
In the next article I am going to discuss the followings,
  1. How testing is down and different types of testing
  2. Finding support and resistance based on volume spread analysis method

Please watch the following video if you want to learn and understand Volume Spread Analysis in Trading  concept in a more better way.

Here, in this article, I try to explain Volume Spread Analysis in Trading. I hope you enjoy this article. Please join my Telegram Channel to learn more and clear your doubts. https://t.me/tradingwithsmartmoney.

Leave a Reply

Your email address will not be published. Required fields are marked *