Vsa Is Easy!

I’ve seen that many traders trying to apply Volume Spread Analysis (VSA) are having a hard time since VSA is more of a method than a system, which could be comprehended differently by different people. As you could’ve seen, the all-time leader in the dukascoppy contest is a VSA trader. Therefore, here I’ll be sharing my methods, which take a more simple approach to help fellow traders understand better about VSA and how to apply it to actual trading with simple set-ups.

VSA traders care about 3 things: Volume, Spread and Close. We don’t care about indicators, COT data, news… because the best indicator we could see is our chart. Chart doesn’t lie. Chart contains the activity of traders and the activities are performed by the form of volumes. Spread is taken into the context to see whether the activity is panic or steady. The close shows the results of the fight between buyer and seller on a certain candle, whether it closes as a pin, off the low, off the high or absolute low/high.

Here’s explanation of various important terms and concepts:

Accumulation

Accumulation begins with stopping (ultra high) volume on a down move, then into a range. Professional money is buying. They do not just go into the market and start massive buying however. This will only put the price up against them, so they accumulate over a period of time, buying when bouts of selling come into the market to get the lowest prices. Higher volume is seen at lower prices. Once this phase has been established we also refer to it as “strength in the background”.



Distribution

Distribution begins with stopping/climactic (ultra high) volume on an up move, then into a range. Professional money is selling (the reverse of accumulation). As the market rallied, a level was reached at which traders who have missed out on the up move or have sold prematurely are liable to buy late in the up move. This gives professionals the opportunity to sell unnoticed in terms of price, but the volume will be very high at the higher prices. This phase is also referred to as “weakness in the background”.

Test (low Volume)

Testing is a very frequent signal. Look to buy when you already have signs of strength in the background (stopping volume/accumulation) and vice verse, pushed through a small area of supply, and came back to test that supply on low volume. It should be followed by an immediate up move. This is my most common trade entry.



Test (high Volume)

Demand is still present on a high volume test of support (low prices). With strength in the background, this is similar to stopping volume showing the activity of professional traders still taking long positions for an expected up move, at lower prices. Supply would be shown if this test is at a recent supply level.

No Demand (ND)/ No Supply (NS):

A no demand bar as its name suggests, there’re no demand left so price have to move down, the supply is overwhelming demand. ND bar should be spotted when we already have major weakness brought by stopping volume. ND is an narrow spread up-bar with volume less than previous 2 bars. Vice verse could apply for No Supply bar.



Effort to Rise/Push through

Price pushes through an area of resistance (supply) without a significant volume increase. This shows that sellers are no longer interested in that level, and price will continue up until more supply is found.



Effort to Rise (Failed)

There is a wider spread up bar on high volume while the next bar reverses down. It’s a serious sign of weakness.
If the next bar(s) are down, this can only show that, within the high volume seen bar before, selling overcame the demand.

Upthrust

Upthrusts are money-making traps to catch stops and are usually signs of weakness. If you have a distribution area directly behind you, it now becomes a very strong indication of weakness. And, if the volume is high, it adds more weight. A sharp move down to follow will confirm the weakness.
Why have upthrusts? In any market, you will have stop orders above the market. Because traders think the same things collectively, these stops will be in a fairly close price band. Then, the market makers, knowing where these stops are, hit them with little cost to themselves.
The same applies in reverse in down markets and we call it a “spring”.



On a buying climax there is a rapid price rise on high volume followed by bar(s) that do not make a higher close. Uninformed traders will continue to buy the trend, unknowingly. This gives the professional trader the opportunity to sell into the buying at very high prices without bringing the market down yet. This stops the bull market.

Shake Out

(Before an expected up move) This is a widespread down bar that then reverses to close near the open or highs on high volume. This is a money-making maneuver to hit stops. Traders who were thinking bullish are now fearful to enter the market. This shows that professional money is coming in and buying, absorbing the weak sellers.

All of these apply in reverse as well.

That’s the basics of VSA in this article, with time and effort spend, the result will be very rewarding since we are chasing the footprint of the smart money who are ruling the market.