Volume Spread Analysis
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Volume Spread Analysis
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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.
Let us understand bullish trend formation. The bearish trend turned into the 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.
We will come to this market structure later. Just understand the overall concept
Let’s understand how to differentiate different types of volumes like
Now we have four types of volume. Let’s find out in the chart
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 the following characteristics:
Rising Volume — Peak (Highest Point)— Falling Volume
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 the previous pick volume. Ultra-High Volume is the Highest Volume in the current session. It is higher than the previous peak 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
In volume spread analysis few facts which we are required for chart analysis. These facts are:
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 transaction 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.
Read Part1 and Part2 for a better understanding
Re call the market structure that we have discussed above
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.
Now we have found two important rules for volume spread analysis
Some volume spread analysis that suggests the end of the downtrend. These are
Now we will discuss these 3 pointers
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:
Two possible outcomes 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 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.
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 on the right side of the image
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.
If the volume had represented SELLING, how can the spread be narrow? There are only two possible outcomes for a narrow spread DOWN-day on very high volume.
This topic will be covered in the next separate article
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.
Please watch the following video if you want to learn and understand Volume Spread Analysis in the Trading concept in a better way.
In the next article, I am going to discuss Reversal Candlestick Pattern Analysis in detail. Here, in this article, I try to explain Volume Spread Analysis in Trading . I hope you enjoy this article. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.
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,
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You have likely heard the term Volume Spread Analysis before. It is often abbreviated as just VSA.
If you have heard of it, chances are you have been put off by how confusing it is.
In today’s article I will show you the simplified and practical way to use VSA.
Theoretically, you will find that mastering VSA will take a long time as it gets complex. However, always remember that theory is not what makes you money in the market.
It is only the beginning, the real secret sauce is perfecting your execution methods and risk management.
VSA is a comparison of the distance between a period high and low to the total volume traded.
That is, what is the difference between the closing price and the open price of the candle. Furthermore, how does that distance compare to the volume traded?
If you are starting to get confused at this point, hang tight as I will illustrate it with real world examples shortly.
Before you continue, it is recommended to read up on trading volume in this article if you need a refresher.
Before I show you the visual examples of VSA I want to explain the two strategies.
I will jump into each of these strategies into more details and illustrate a trade setup to help you better understand VSA.
Both of these trading strategies work on any time frame. If you are swing trading or day trading, it does not matter.
You will find that VSA is equally powerful on all time frames and especially effective on multiple time frame analysis.
This simple trading strategy will be very effective when applied to your current strategy.
Remember that not trading strategy is stand-alone perfect out of the box. Everything requires constant adjustment and this is just one tool to be combined with others for more precision and success.
Volume Spread Analysis – Short opportunity when:
In the char below you can see an example of this setup on the Apple daily chart.
Volume Spread Analysis – No demand on up bar.
But how did this trade opportunity workout?
You can see in the next chart that our VSA was followed by a 6.06% drop in just 8 trading days! This is an amazing trading opportunity.
This becomes even more profitable when you combine it with options trading.
Now let’s flip the setup and look at how to use volume spread analysis to catch long reversal trades.
As you can see on the chart below, the candle range (high minus low) is very narrow. This is a low spread.
At the same time you can see that volume was also weaker than the past two days.
This indicates a lack of selling pressure, and a potential exhaustion of the selling wave.
Therefore, you are looking for a long opportunity.
Once you get your other trading strategy qualifiers present you can try a low risk, high probability long here.
You can see that this trade setup generated a whopping 15% return in just 12 trading days. That is a great return for less than a three week holding period.
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Volume Spread Analysis is one of the most important concepts of technical analysis. This concept has been clarified by Dr Alexander Elder, one of the biggest developers of technical tools and authoring a number of top-selling financial books. Two of his most successful books are the new trading for a living and come to my trading room.
The consensus in his writing is that volume plays a very important role for traders . It is one of the key movers of the market because the market is mostly moved by fear and greed among the participants. Volume is also important in confirming a trend and chart patterns .
In this article, We will look at the 5 key concepts of volume spread analysis.
Volume is the amount of an asset that is being traded in a given time. For example, if 10,000 shares of Apple are bought and sold in a given day, this is known as volume. If the volume drops to 8,000 the following day, you can say that the volume has declined.
A spread , on the other hand, is the difference between two things . A common definition of a spread in forex trading is the difference between the bid and ask price of a pair . For example, if the AUD/CAD has a bid of 0.91420 and an ask of 0.92426, the spread is about about 20. There are many examples of a spread. For example, if the price of Brent is trading at $85 and WTI is trading at $80, the spread is $5.
Volume spread analysis is a method of analysis that looks at candles and the volume per candle to determine price direction. It looks at the quantity of volume per candle, range spread, and the closing price.
There are several steps you need to follow when trading volume spread analysis. First, you need to ensure that you are using candlesticks to trade. It does not work well when you use other chart types like line, bar, and renko charts.
Second, you need to ensure that the broker offers reliable volume . Finally, you should pay a close attention to the timeframe of the chart . In most cases, volume analysis on a very short timeframe like a minute chart won’t make sense. We recommend that you use daily, weekly, or monthly chart .
One more tips; You should look at the spread between the price bars and the volume bars and see the trend.
Accumulation is the first stage in understanding volume price analysis. A good example of understanding assuming that you are an entrepreneur who sells shaving blades. To make more sales, you will need to market the products and showcase their competitive advantage against the peers. You can use any marketing concepts available.
Before you do this, you need to ensure that you have enough products to sell because if you don’t, the campaign will not achieve its goal. In the marketing mix, this is known as Place. In volume spread analysis (VSA), this is known as accumulation where the insiders fill up their ‘warehouses’ thus increasing the ownership of the assets . As the insiders buy, the price of the assets (such as shares) will continue to fall.
The media is a powerful tool used by the insiders to encourage the owners of the assets to sell. As a result, in the accumulation phase, the price falls while the volume increases .
Now that the insiders have achieved their goal of reducing the price and increasing their holdings, the next phase is known as the distribution .
In this stage, since the insiders already own the assets, they start to move the market up . Once again, the media plays an important role in hyping the assets owned by the insiders. In response, the assets whose price had declined greatly now starts to rise .
The rise begins fast before becoming gradual with time as the insiders figure out their next course of action.
The insiders now have their stores empty . To ordinary people, they would now start to go in the first stage and accumulate. Wrong. The insiders are wiser than that. Before they go back to the first stage, they test the market .
They test because they don’t want to continue buying and then be met with a new wave of selling from retail investors. They don’t want that. In testing, the insiders start a minor selling campaign where they sell low volumes of the assets with the aim of creating demand and moving the price up.
If the supply test goes as planned by the insiders, the next stage is to test the demand . At this stage, the last thing the insiders want is to start a campaign to fill their warehouses, move back into an area which has high demand thus pushing the market in the opposite direction. To avoid this situation, they deploy a test.
This test is intended to ensure the demand pressure has been absorbed in the distribution phase. Also, at this phase, the insiders have already moved the price from the wholesale price to their target retail level. After this test of demand is complete, they start a new wave of selling pushing the price lower.
In the first stage, the retail investors are selling while the insiders are buying. The insiders are the large investors and hedge funds who have knowledge on the company. They work hand in hand with their investment bankers.
While insider trading is a criminal offense, retail investors have been deluded that it does not exist. The fact is that insider trading where investment banks and company executives leak information to their clients is alive and well.
So, in this stage, the insiders start a selling campaign using the media as their mouthpiece . They push the price down and start the first stage once again.
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Volume Spread Analysis is one of the most important concepts of technical analysis. This concept has been clarified by Dr Alexander Elder, one of the biggest developers of technical tools and authoring a number of top-selling financial books. Two of his most successful books are the new trading for a living and come to my trading room.
The consensus in his writing is that volume plays a very important role for traders . It is one of the key movers of the market because the market is mostly moved by fear and greed among the participants. Volume is also important in confirming a trend and chart patterns .
In this article, We will look at the 5 key concepts of volume spread analysis.
Volume is the amount of an asset that is being traded in a given time. For example, if 10,000 shares of Apple are bought and sold in a given day, this is known as volume. If the volume drops to 8,000 the following day, you can say that the volume has declined.
A spread , on the other hand, is the difference between two things . A common definition of a spread in forex trading is the difference between the bid and ask price of a pair . For example, if the AUD/CAD has a bid of 0.91420 and an ask of 0.92426, the spread is about about 20. There are many examples of a spread. For example, if the price of Brent is trading at $85 and WTI is trading at $80, the spread is $5.
Volume spread analysis is a method of analysis that looks at candles and the volume per candle to determine price direction. It looks at the quantity of volume per candle, range spread, and the closing price.
There are several steps you need to follow when trading volume spread analysis. First, you need to ensure that you are using candlesticks to trade. It does not work well when you use other chart types like line, bar, and renko charts.
Second, you need to ensure that the broker offers reliable volume . Finally, you should pay a close attention to the timeframe of the chart . In most cases, volume analysis on a very short timeframe like a minute chart won’t make sense. We recommend that you use daily, weekly, or monthly chart .
One more tips; You should look at the spread between the price bars and the volume bars and see the trend.
Accumulation is the first stage in understanding volume price analysis. A good example of understanding assuming that you are an entrepreneur who sells shaving blades. To make more sales, you will need to market the products and showcase their competitive advantage against the peers. You can use any marketing concepts available.
Before you do this, you need to ensure that you have enough products to sell because if you don’t, the campaign will not achieve its goal. In the marketing mix, this is known as Place. In volume spread analysis (VSA), this is known as accumulation where the insiders fill up their ‘warehouses’ thus increasing the ownership of the assets . As the insiders buy, the price of the assets (such as shares) will continue to fall.
The media is a powerful tool used by the insiders to encourage the owners of the assets to sell. As a result, in the accumulation phase, the price falls while the volume increases .
Now that the insiders have achieved their goal of reducing the price and increasing their holdings, the next phase is known as the distribution .
In this stage, since the insiders already own the assets, they start to move the market up . Once again, the media plays an important role in hyping the assets owned by the insiders. In response, the assets whose price had declined greatly now starts to rise .
The rise begins fast before becoming gradual with time as the insiders figure out their next course of action.
The insiders now have their stores empty . To ordinary people, they would now start to go in the first stage and accumulate. Wrong. The insiders are wiser than that. Before they go back to the first stage, they test the market .
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