Price tells you about market movements, and volume provides the reasons. That’s the basic theory behind Volume Spread Analysis (VSA). If you ever miss crucial moves because of the late signals by conventional indicators, VSA might be the missing piece of your trading puzzle. Unlike other technical analysis forms that entirely prioritise price action, VSA focuses on the relationship between volume, price, and spread (the gap between high and low in a bar). Such an exclusive strategy helps investors understand the intentions of smart money and plan their moves accordingly.
What is Volume Spread Analysis?
Volume Spread Analysis is a trading method that helps you detect the connection between volume, closing price, and price movement to forecast market drifts. Its development was inspired by the work of Richard D. Wyckoff which was later popularised by Tom Williams.
VSA strategy believes that large institutional traders, often called “smart money” leave behind clues through their trading volume. By evaluating these clues in context, VSA attempts to reveal accumulation, distribution, and manipulation phases in the market.
Key Concepts in Volume Spread Analysis
- Law of Supply and Demand
This is the foundation of VSA. Prices rise when demands outweigh supply, and they fall when supply outweighs demand. VSA, by using price and volume bars, understands the dominance between demand (buying) and supply (selling). Such as, buying pressure could be specified by a broad spread up-bar along with a high volume, and a narrow down-bar along with high volume might tell you about hidden buying or absorption.
- Law of Cause and Effect
This law explains the reason behind every market swing, where accumulation (buying) or distribution (selling) is the cause, while the following price trend is the effect. Consider a long sequence of slanting movement with surging volume as smart money accumulating before a major uptrend.
- Law of Effort vs. Result
Here, volume is the effort and price movement is the outcome, where a high volume and little price fluctuation could signify resistance or absorption. Similarly, if prices strongly fluctuate with modest volume, it’s a breakout with conviction. Any disproportion between effort and result is regarded as a trend change.
How Does Volume Spread Analysis Work?
VSA prioritises volume and spread of price bars evaluation in context. Investors ignore the volume in isolation, but interpret it alongside the price bar’s size and its close comparison to the range. Consider:
- Wide spread up-bar with high volume: The close sits in the middle row indicating selling into strength.
- Narrow spread bar with high volume: May suggest professional accumulation or distribution.
- Down bar with low volume: Specifies a lack of selling pressure, probably preparing for a bullish move.
It’s not entirely about distinct bars but the behaviour of spread and volume across numerous candles, where context is the key.
Common VSA Patterns and Signals
1. Zero Demand Bar, where an up-bar features low volume and narrow spread specifying zero interest from smart money to drive higher prices.
2. Stopping Volume, where a narrow spread bar succeeds a high-volume down-bar signalling buyer’s entry.
3. Determination to Rise or Fall, where attempts to move the market are indicated by wide spread bars with high volumes.
4. Climatic Action, where a long trend is followed by an exceptionally high volume to indicate exhaustion and possible setback.
5. Testing, where a low-volume down-bar following a high-volume bar mainly tests the strength of the buyer or seller.
These signals are not useful in segregation but become powerful when viewed within the comprehensive market structure.
Volume Spread Analysis Vs Traditional Technical Analysis
Old-style Technical Analysis (TA) highly relies on reactive and lagging indicators like MACD, RSI, or moving averages, which take historical prices to calculate market insights. VSA, on the other hand, emphasizes on the smart money’s current position.
- TA considers evaluating indicators and price swings.
- VSA entirely emphasizes on price context and behaviour.
TA represents the happenings, and VSA defines the reason and together they can boost market insights.
How to Use Volume Spread Analysis for Intraday Trading?
For intraday traders willing to catch early signs of breakouts or reversals, VSA can be highly beneficial. The strategy lies in noticing volume behaviour during consolidations, breakouts and retests.
- Identify shopping volume after a steep fall to spot possible long entries.
- No demand bars close to resistance can signal a short setup.
- Volume spikes can help recognise market sentiment for the day during the initial half an hour of market open.
For in-depth research during intraday trading, consider short-time frames and always hold-on for validation before moving on to trades.
How to Combine VSA with Other Indicators (Moving Averages, RSI)
VSA alone is very commanding, but merging it with other indicators can provide confirmation:
- Moving Averages: Use moving average to identify the global trend movement, where VSA signals against the trend should be carefully considered.
- RSI: If RSI shows overbought, and VSA shows no demand, it supports the event for a short trade.
- Support or Resistance Areas: For better timing, combine VSA signals with key levels.
These combinations can lessen misleading signals and enhance accurate entry or exit.
Advantages of Volume Spread Analysis
- Primary Signals
VSA allows investors to detect accumulation or distribution phases before any significant price swings, giving investors an edge by letting them position themselves early, ahead of retail participation.
- Smart Money Insight
It delivers insights on the “smart money”, which explains the activities of institutional traders. Investors can align their trades with these large participants rather than against them just by following spread or volume trends.
- Works Across Markets
Adaptability is the key for VSA that vigorously functions across countless markets including forex, Cryptocurrencies, stocks, and futures, making it an exquisite tool for multi-asset investors seeking stability in their research.
- Flexible
Whether you’re following intraday charts or daily or weekly swings, VSA shows flexibility to various trading timeframes, letting investors adapt the strategy to match their goals with personal trading style.
- Excellent Combination with Other Tools
VSA alone is very commanding but becomes even more powerful when paired up with old-style technical indicators like RSI or moving averages. This thoughtful strategy optimises the reliability of trade signals and boosts overall confidence in entry or exit decisions.
- Deeper Market Understanding
VSA motivates traders to understand the relation between price spread, volume, and market intention over prices. This profound knowledge leads to a more well-versed, strategic approach to trading movements.
Limitations of Volume Spread Analysis
- Subjectivity
Interpreting VSA signals can be subjective, as different traders will have different conclusions over the same price action and volume. The consistent and perfect application of principles demands time and experience.
- Data Quality
In decentralised markets like crypto and forex, gaining accurate volume data can be tricky, which can hamper the consistency of VSA unless traders use brokers or platforms that provide aggregated data or tick volume.
- Learning Curve
Mastering VSA concepts involve a steep learning curve, particularly in the time of identifying trends in various market conditions. Primarily, beginners may find it difficult to grasp the terminology and nuances.
- No Guarantees
Despite being potential, VSA doesn’t guarantee success in the markets just like any other trading method. It is vulnerable to misleading signals and you apply it with proper risk management and confirmation strategies.
- Practice-Dependent
To enjoy the full benefit of VSA, traders must backtest, recognize and improve their interpretation over time. Misreading signals and making poor decisions is easy if you’re not involved in regular practice and self-review.
Conclusion
Volume Spread Analysis offers a different perspective to view the markets. Rather than focusing on the lagging indicators or following the trend, VSA empowers you to understand the position of smart money. Gaining expertise might be time-consuming, but once you master it, it can become a powerful asset of your trading edge. Whether you’re trading intraday or holding sustainable positions, considering VSA as your toolkit can result in more well-versed decisions with better market timing.
FAQs
Volume Spread Analysis (VSA) is flexible and can fit into different timeframes based on your trading style. Intraday traders mostly prefer shorter time frame charts to spot temporary volume-price relationships. Swing traders commonly choose 1-hour or daily charts to spot bigger accumulation or distribution trends. The strategy lies in finding a timeframe to have clear signals with enough volume data, while aligning with your trading objectives and risk tolerance.
Definitely. VSA has a strong influence on swing trading. Traders can spot accumulation or distribution phases that lead to major price swifts, just by assessing volume and price spreads on daily or 4-hour charts. This assists swing traders enter positions early and enjoy the trend. VSA further helps to gauge the strength or weakness of current trends, allowing for better entry and exit points. Paired with other tools like moving averages, it serves as an effective strategy for swing setups.
VSA, when applied with skill and context, offers consistency. In contrast with traditional indicators that lag, VSA provides insights in advance by interpreting the intent of smart money through volume and price spread. It excels in recognising hidden buying or selling pressure and turning points. Nevertheless, it’s not perfect and demands experience for accurate interpretation just like any other tools and is more powerful when paired with other tools like trendlines, RSI, or moving averages for risk management and confirmation.
Basic VSA doesn’t require any unique software. You simply need a charting platform that shows volume and candlesticks. Though, there are more advanced tools like TradeGuider that systematise VSA signals and make interpretation seamless. Platforms like TradingView and MetaTrader also empower custom indicators and scripts to help you with VSA analysis. While not compulsory, these tools can accelerate the learning curve and optimise accuracy by emphasising on trends and signals for improved trading decisions.
Indeed, VSA can be used in larger markets, including stocks, forex, commodities, futures, and cryptocurrencies. Since it follows the universal principle of supply and demand, it is flexible to various instruments. However, traders should keep in mind that volume data quality can differ by market. For instance, decentralised markets like forex and crypto, make less transparent volume data than the stock markets. Still, using tick volume as a proxy can offer valuable insights when analysed in context with price action.
