Volume Spread Analysis in Trading

Volume Spread Analysis (VSA) in Trading

In this article, I will discuss Volume Spread Analysis (VSA) 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 (VSA) in Trading?
  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 do you trade based on selling climax and stopping volume?
MARKET STRUCTURE With Respect To Volume Spread Analysis

Let us understand bullish trend formation. The bearish trend turned into a 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 to this market structure later. Just understand the overall concept.

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

Let’s understand how to differentiate different types of volumes, like

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

Now, we have four types of volume. Let’s find out in the chart

Volume always moves in a cycle.

Rule -: You can visually compare Mountain Peaks to identify volume peak structure. The key is to understand the structure of the peak clearly. Volume peak has the 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 is lower than the previous peak Volume. Average Volume is the volume that coincides with the Moving Average 20 of the volume indicator.

High volume and Ultra-high volume: high volume equals the 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 is 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, a few facts 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., the range of the price bar)
  3. The Close (the closing price of the current bar)

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

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

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

Components of volume Spread Analysis

Upside move with respect to volume
  1. The smart money has no interest in the upside – Low volume.
  2. Smart money is 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 a better understanding

SIGN OF STRENGTH BASED ON VOLUME SPREAD ANALYSIS

Recall the market structure that we have discussed above

SIGN OF STRENGTH BASED ON VOLUME SPREAD ANALYSIS

Sign of strength means. The stopping action of the downtrend

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

Again, recall the volume interpretation

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

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

  • The 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 the downtrend. These are

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

Now, we will discuss these 3 pointers

What is a selling climax?

This condition marks the end of the approaching end of a particular downtrend. This panic selling by retailers (or the 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 a trend to reverse. (after a significant extended down move on the time frame of interest )
  • The trend will accelerate to the 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 secondary reaction generally follows a selling climax. Why?

Two possible outcomes after selling climax

  1. Either the professional money is BUYING into the SELLING [see the 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 a trend continuation after selling the climax.

If buying during the Selling Climax was principally to support prices temporarily and check a panic or relieve a panicky situation, this support stock will continue after a technical bounce from support. If price supply is sufficient 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 Supply (i.e., no more sellers), an obvious conclusion that the market will rally, as shown on the right side of the 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 the 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, demand has to overcome the supply
  • It is the volume of smart money coming into the market and stopping it from 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 has insufficient muscle to stop the market from 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. The first bar close may be low 2nd bar close-mid or high

What is stopping volume?

Two possible outcomes after seeing the stopping volume

If the volume had represented SELLING, how can the spread be narrow? Only two possible outcomes exist for a narrow spread DOWN-day on a very high volume.

  1. Either the professional money is BUYING into the SELLING [see the 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 the support region.
Trend continuation after seeing stopping volume

This topic will be covered in the next separate article

Trend Reversal After Seeing Stopping Volume

After seeing the 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 do you trade after seeing stopping volume?

Time To Buy The Market AFTER TEST

  1. If the day closes on the lows, you must wait to see what happens next.
  2. If the next day is level or up, this must surely show buying on the previous day.
  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 are no sellers or no Supply.
  5. Buy above that candle.
  6. STOP LOSS below the low

Volume Spread Analysis in Trading Summary:

Volume Spread Analysis (VSA) is a trading methodology that examines the relationship between the volume traded by professional traders and price action. The VSA is based on the trading methods of Richard D. Wyckoff, who believed that the market is driven by the large professional interests that he dubbed the “Smart Money.” The core idea is that volume precedes price movement, and by understanding the interplay between the two, a trader can infer what the Smart Money is doing and align their own positions accordingly.

Here’s how traders typically use Volume Spread Analysis in trading:

Key Concepts of VSA:
  • Demand and Supply: VSA looks at how volume interacts with price movements to determine areas of supply (resistance) and demand (support).
  • No Demand and No Supply Bars: These bars with low volume indicate a lack of interest from the Smart Money at current price levels, often signaling a potential reversal.
  • Tests: These are low-volume tests of supply or demand areas after a strong move with high volume, suggesting a possible continuation if the price does not reverse.
  • Stopping Volume: Typically, a high volume bar after a prolonged move down indicates that selling pressure may be exhausted, suggesting a potential bottom.
  • Climax Volume: High volume after a rapid price movement indicates a climax where Smart Money might be taking profits or initiating positions in the opposite direction.
VSA Trading Strategy:

Identify the Trend: Use volume and price to assess the market’s general direction. High volume in the direction of the trend suggests strong support from Smart Money.

Look for Signs of Strength or Weakness:

  • Strength: Signs include widespread up bars closing near the highs with higher volume.
  • Weakness: Signs include widespread down bars closing near the lows with higher volume.

Wait for a Sign of a Reversal or Continuation:

  • Reversal: Anomalies in volume and price action that suggest a change in direction, such as a high volume reversal off a key level.
  • Continuation: Low volume pullbacks in a trend that suggests the move is not over.

Trade Entry:

  • Buying: Look for low-volume test bars after a sign of strength or high volume stopping volume at a potential bottom.
  • Selling: Look for low-volume test bars after a sign of weakness or high-volume supply at resistance levels.

Setting Stop Losses: Place stops around key VSA signals that invalidate the trade if reached.

Take Profit: Profit targets can be set at levels where volume indicates a change, such as at previous supply or demand levels.

Risks and Considerations:
  • Context: VSA signals should not be taken at face value but considered within the broader market context.
  • Confirmation: Some traders wait for confirmation of VSA signals with other technical analysis tools or indicators.
  • Market Conditions: VSA might be more or less effective depending on the market and current liquidity conditions.
  • Interpretation: The interpretation of volume can be subjective. It’s essential to backtest and practice reading VSA signals within the context of historical price action.

Volume Spread Analysis is a nuanced approach that requires much experience and judgment to use effectively. It emphasizes understanding market psychology and the actions of professional traders, which can be a powerful tool in a trader’s toolkit if applied correctly. VSA should be part of a disciplined trading plan with robust risk management, as with all trading strategies.

In the next article, I am going to discuss the following,
  1. How testing is down and different types of testing
  2. Finding support and resistance based on the volume spread analysis method

In the next article, I will discuss Reversal Candlestick Pattern Analysis in detail. In this article, I try to explain Volume Spread Analysis in Trading. I hope you enjoy this article. Please join my Telegram Channel, YouTube Channel, and Facebook Group to learn more and clear your doubts.

1 thought on “Volume Spread Analysis in Trading”

  1. Hello,
    Thx for your very good explanations.

    I have got one question regarding the volume indicator:
    The bars of the standard MT4 volume indicator just tell you whether the volume was higher in comparison to the previous bar (then the current bar becomes red or vice versa.

    But when I see it right, your volume indicator shows red bars for example when the selling power was higher. And the volume is displayed by the hight of the volume candle.

    When I understand it right the standard MT4 indicator does not show whether the selling power was higher but only the volume quantity.

    Could you please let me know which volume indicator you use,

    Thx

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