VSA Trading Strategy

VSA (Volume Spread Analysis) Trading Strategy

In this article, I will discuss the VSA (Volume Spread Analysis) Trading Strategy in detail. Please read our previous article, where we discussed Spring and Upthrust Trading Strategy. At the end of this article, you will understand the following three VSA Trading strategies.

  1. The Shakeout
  2. Stop Hunting
  3. Outside Reversal Pattern
Introduction to VSA trading strategy

Today, we will discuss volume spread analysis intraday trading strategy. Basically, the volume spread analysis entry strategy is based on reversal trading. That means finding a turning point in a trend either

  • Trend reversal or
  • Pullback reversal

Today, we will discuss pullback reversal. I mean, how do you make a trade based on volume spread analysis in an existing trend

Note: – today, we will discuss only finding an entry in an uptrend. The exact opposite of a downtrend

Volume spread analysis that suggests a sign of the end of a downtrend or end of the pullback in an exiting uptrend is

  1. Selling climax
  2. sopping out volume
  3. End of a falling market

The above points are discussed in this article, Volume Spread Analysis

4 step Process for Volume Spread Analysis (VSA Trading) Entry
  1. Identify the trend
  2. identify the signs of weakness in an existing uptrend
  3. Wait to test the weakness for confirmation of the continuation of the uptrend
  4. Look for any bullish reversal candlestick pattern for entry

In our Previous article, we have discussed

  1. First, identify the signs of weakness
  2. Wait to test the weakness for confirmation of trend cont…

Today, we will discuss

  1. Look for any reversal candlestick pattern for entry
Bullish VOLUME PRICE SIGNAL CANDLESTICK PATTERN FOR ENTRY
  1. OUTSIDE/ ENGULFING
  2. STOP HUNTING
  3. SHAKEOUT
Outside Reversal Pattern

We have discussed this article here, so please go through this article for more information.

Outside Reversal Pattern

BULLISH OUTSIDE REVERSAL PATTERN STRUCTURE
  1. The first candle is a narrow-range candle or Doji
  2. The second candle completely engulfs the first candle and closes above the first candle high.
  3. The second candle is low below the first candle’s low, but the close must be above the first candle’s close and high above the previous candle’s high
  4. A high-volume should accompany the second candle

BULLISH OUTSIDE REVERSAL PATTERN STRUCTURE

VSA trading strategy

Background:

The background is extremely important. You should see strength in the background. You should see strength in the background with stopping volume, a selling climax, OR an end of a falling market

Volume spread analysis trading strategy

Stop hunting

It is also called pin bar spring or upthrust

Go through the article below for more information

Spring and Upthrust Trading Strategy

PIN BAR Trading Strategy

Logic

Smart money placed limit sell order above resistance and limit buy order below support to absorb panic buying or selling by retailers for breakout trading entry by placing stop loss buy order above resistance or stop loss sell order below support.

VSA trading strategies

Why do they do it?

The main objectives are:

  1. To get volume
  2. Avoid Slippage due to  big order
  3. Smart money testing demand above old resistance before moving down or testing supply below support before moving up

Spring is an example of a “bear trap.” WHY? Because the price drop below support appears to signal the resumption of the downtrend. But In reality, the drop marks the end of the downtrend, thus “trapping” the late sellers or bears.

The depth of the price drive to new lows below the support and the relative level of volume on that penetration can judge the strength of the sellers.

A spring involves penetrating a well-defined support level on low or moderate volume. If a stock is going to break the support, it must break with high volume. The spring action shows that the stock is trying to break down and failed. It is an important sign of strength

Background:

The background is extremely important. You should see strength in the background. You should see strength in the background with stopping volume a selling climax, OR an end of a falling market

Volume spread analysis trading strategies

The Shakeout

As the name suggests, shaking out weak holders in existing uptrend buyers.

CRITERIA for shakeout for a long
  • FAILURE TO FOLLOW THROUGH AFTER BREAKING a well-defined SUPPORT or resistance
  • Widespread down closing on the middle or low of the candle
  • Volume can be high or low.
  • Engineered to catch stops and induce selling

CRITERIA for shakeout for long

WHY shakeout? FORM OF MANIPULATION

Let’s discuss an uptrend

  • If this is seen in an uptrend, it is a strong buy opportunity. Think of Smart Money. They have to buy at lower prices and will do anything to get the price down to buy more of the instrument they are accumulating.
  • Design to lock in weak shorts and shakeout early longs
  • SHAKEOUT is a maneuver used to catch stops and trap breakout traders. It is often observed before the market takes off in a particular direction.
  • SHAKEOUT can be a sign of strength or a sign of weakness depending on the direction of the SHAKEOUT

WHY shakeout ? FORM OF MANIPULATION

Background:

The background is extremely important. You should see strength in the background. You should see strength in the background with stopping volume, a selling climax, OR an end of a falling market

Future DIRECTION

A ‘Shakeout’ on low volume is really a violent test and has the same effect. It shows supply has disappeared, and you would expect higher prices.

A ‘Shakeout’ on high volume shows demand was prepared to absorb the supply on that bar, but they would likely want to test that supply in the future. Any low-volume testing back into the area of the Shakeout would be a strong SOS.

VSA trading strategy Volume spread analysis trading strategy

Where appear shakeout
  1. In clear support or resistance level or
  2. In a Well-defined trading range

Volume Spread Analysis Trading Strategy Volume Spread Analysis Trading Strategy

Shorting AFTER you see a shakeout pattern
  • In an existing uptrend, you can buy above the shakeout candle
  • For trend reversal, wait for a no-demand candle, then buy above the candle

Volume Spread Analysis Trading Strategy Volume spread analysis trading strategies Volume Spread Analysis Trading

VSA Trading Strategy Summary:

Volume Spread Analysis (VSA) is a trading methodology that examines the relationship between the volume traded by professional traders and price action. VSA is based on the principle that the forces of supply and demand govern the market, and thus, the analysis of the volume and the price spread (range of the candlestick or bar) can indicate the balance between the two.

Here’s a breakdown of how to implement a VSA trading strategy:

Understanding the Basics of Volume Spread Analysis (VSA) in Trading:
  • Volume: Reflects the total number of shares or contracts traded during a specified time frame.
  • Spread: The difference between the high and low of a price bar or candlestick.
  • Closing Price: Where the price has closed within the spread. VSA looks at whether the close is in the upper, middle, or lower part of the bar.
Principles of VSA:
  • No Demand and No Supply Bars: If the market rises with the decreasing volume, it suggests there is no demand, and if it falls with the decreasing volume, it suggests no supply.
  • Test for Supply: After a down-move on a bar/candle with a narrow spread, closing up with lower-than-average volume suggests that the market is testing for the presence of supply.
  • Effort versus Result: If a market moves on high volume but results in a narrow spread and little price advancement, it suggests a possible reversal due to supply/demand imbalance.
Implementing VSA (Volume Spread Analysis)
  • Step 1: Identify the Trend: Understand the larger timeframe trend to know if the market is in a bullish, bearish, or sideways trend.
  • Step 2: Look for High-Volume Bars: High-volume bars indicate professional activity. The key is to see how the market responds to this volume in subsequent bars.
  • Step 3: Analyze the Spread: After a high-volume bar, analyze the spread of the following bars. A narrow spread on a high volume might indicate weakness, while a wide spread on a high volume could indicate strength.
  • Step 4: Observe the Closing Price: If the close is near the top of the bar/candle on high volume, this indicates strength. If the close is near the bottom on a high volume, it indicates weakness.
  • Step 5: Entry Points: A potential buy signal is given when evidence of accumulation (demand outweighs supply). A potential sell signal is provided when there’s evidence of distribution (supply outweighs demand).
  • Step 6: Confirm with Additional Analysis: Look for confirmation with additional indicators or patterns, like moving averages, trend lines, or support/resistance levels.
  • Step 7: Trade Management and Exit: Determine exit points and stop-loss levels based on VSA signals contradicting your position. Manage the trade by adjusting stop-loss levels as the price moves in your favor.
Additional Tips for VSA Trading:
  • Volume: Always compare the current volume to the average of past bars to gauge if it’s high or low.
  • Background: Look at the VSA indicators in the context of what the market has been doing recently.
  • No Trade Zones: Sometimes, VSA will not provide a clear indication of the market direction. In such cases, it’s best to stay out of the market.
  • Practice: Use historical charts to practice identifying VSA patterns and signals before trading live.
Risk Management:
  • Never risk more than a small percentage of your account on a single trade.
  • Always use stop-loss orders to manage your risk.

VSA can be a complex methodology because it requires interpreting the interplay between volume, spread, and closing price. Additionally, VSA is not typically a standalone strategy; it’s more effective when combined with other forms of technical or fundamental analysis. It also requires a good trading platform that provides real-time volume data, crucial for making accurate VSA-based decisions.

In the next article, I will discuss the Option Chain Analysis in Trading. Here, in this article, I try to explain the VSA (Volume Spread Analysis) Trading Strategy. I hope you enjoy this VSA (Volume Spread Analysis) Trading Strategies article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.

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