A free ebook is available on the subject of VSA – Master the Markets (Tom Williams, TradeGuider. Systems). This ebook(PDF) can be downloaded from here. VSA (volume spread analysis) is a forex analysis technique which examines the relationship between the volume traded by professional traders and price. Accumulation is a subtle, sophisticated and sly process of cornering a huge quantity of the stock that makes the following phases possible and worthwhile. Once. FINANSIELL HAVSTANG Feature Set modification appeared twice. The vty lines this function that down, please say undercover identity during to this post. An audit log Rules, select New.
Pay attention to the volume pattern during these rallies. The mark down phase is the most depressing and cruel part of the SM game plan. By the end of it the SM would be taking delivery of his brand new E class Benz while the average investor is scouting for a buyer for his run down maruti. Of course the Markdown phase does offer good opportunities to smart investors who are adept in short side trades.
But the mark down phase has a silver lining towards the end it offers the smart investors many opportunity to enter into some really profitable trades. VSA involves analyzing each bar with respect volume, spread and close. We will ignore the open. Also while analyzing the bar action we will also keep in mind the general background of the market. As a first step let us make some definitions. These are elementary and most of you understand this. But for the sake of synchronizing our thought I will repeat these here.
Upbar - A bar would be called a up bar if the close of the bar is above the close of the previous bar. Downbar A bar would be called a Downbar if the close of the bar is below the close of previous bar. Spread Spread is the difference between High and Low.
A wide spread Bar If the spread of the bar is above 1. The factor of 1. A narrow spread bar if the spread of the bar is 0. The factor 0. Note: The problem of calculating the average spread is that during volatile period the average spread is high and in non volatile period the average spread is lower.
So a bar which could be termed as a wide spread bar WRB in non volatile times could become a average or even a Narrow spread bar NRB in volatile times. For simplicity sake and to take the discussion forward we will keep the above factors common. At a later stage we can discuss about methods to arrive at better methods of defining the average which works at all times. Up close : A close near the High would be termed as a Up close. But for this discussion we will take these values and move forward.
Now we have some basic tools to analyze the bars. Next we will look at volume. CV had raised a valid question on this. How high is high and how low is low? We will take it as the stating point. Mike had pointed out another method. We can discuss these further in the thread later as points of refinement after we establish the basic indicators of VSA. Again as a starting point we will define any volume above 1. Volume above 3 times the average would be termed Ultra High volumes.
Volume below 0. With these basic definitions we are ready to look at some of frequent Indicators do not confuse with the normal TA indicators, here we are talking about the various type of Bars related to VSA analysis Some members felt that the thread looked too elementary in a Advanced Strategy section. Maybe it is true.
I wanted the thread in this way since it should be easily understandable even for the newbee. Also, even more experienced people are not reluctant to look at the market in this way. The indicator trader would definitely find a Bar by Bar analysis a hard pill to swallow. Please note that it will be difficult to build a mechanical trading system from VSA though not impossible.
However knowledge of VSA will greatly help one to understand the market better and will be a great support tool complimenting their trading systems. Also VSA on its own provides some excellent entry and early exit points resulting is good profitable trades. VSA measures the weakness and strength of individual bars.
So we have to always look out for Weakness in a uptrend and for strength in a down Trend. Each bar could be characterized to indicate Strength or Weakness based on the Spread and volume. Weakness Bars: We will start with looking out for weakness. And what a day to talk about Upthrust The charts are full of them today Even the nifty is showing a Upthrust of course not a one of the ideal one.
But distinct weakness shown on the nifty. An Upthrust Bar is a wide range bar, with a high volume and closing down. It indicates that the prices were marked up during the day for simplicity we use day, it is equally applicable on all time frames , the Trading activity was High as indicated by the High volume and the prices dropped to near the low or to the low towards the closing hours.
Looking the SM perspective what happened was that the SM marked up the prices in early trading hours indicating strong bullishness. Enticed by this bullish move the weak money also rushed to acquire the stock. Shorts if any would also have rushed for cover. Meanwhile the SM is quietly distributing their holding to the weak money. In the later part of the day the SM drastically marks the price down trapping the weak money holding stocks at much higher prices.
In order to make this ideal, the Upthrust normally appears after a wide range upbar with high volume. This makes it easy for the SM to markup the price and entice the weak money. Most of the time the Upthrust will be moving into new higher territory. The High of this bar will be much higher than the previous high.. High volume should be an important consideration. What are the Things to Look for in a Uptrust? High Volume and How high? Wide Spread? Close, near or on the Low?
What was the previous bar action? Did the bar into new territory? Is the stock in an up trend? The Answers for the above would decide how potent the Upthrust is. High volume Upthrust are a sure indication of weakness, higher the Volume the stronger the indication. It may be even wise to get out of the stock if the Upthrust has ultra high volume. Wider the spread more potent the Upthrust Lower the closer the stronger the indication of weakness.
Ideally it should close should be the Low. If the close is towards the middle it would mean than the SM was not successful in marking the price down. There was too much demand. The High will be very much higher than the high of the previous bar. This means the SM was really successful in marking the price up and many traders get trapped into bad positions in the end of the day.
Upthrusts are effective when the trend has been in force for some time. Sometime you would find weak up thrusts in early trends. Pseudo Upthrust: Many times you will Upthrusts with low volume. I call them Pseudo Upthrusts.
These are not effective as the Upthrust. But are still signs of weakness.. This can be confirmed from the price action and pivots on the left. If price has reached the fringes of a known resistance area on the previous day, you would do well to look out for the open the next day and WAIT!. The SM has two choices, a To gap up the open above the old reistance. This indicates the SM's commitment to bullishness. This is to discourage selling by traders who are holding stock at previous resistance price range in the hope for more gains!
But herein lies the delicate balance, You have to wait to see if the market makers are selling into the gap or not and if the SM is prepared to absorb the selling. This indicates that the SM is not very bullish and is probing upwards in the resistance zone to see the market reaction.
Depending on the reaction, the SM will decide upon further course of action. If the volumes are medium to medium-high and the price is not moving up ie high equal to or not too much greater than previous high then it's time to jump ship as the aim of SM this time is not to gun shorts stops if they manage it then it's a bonus but to distribute as much stock as possible before the intermediate down trend sets in as it invariably will.
That is not to say that Pseudo upthrusts are not potent. We looked at the Upthrust and Pseudo Upthrsts.. We also looked at what to look for in an Upthrust Bar. The obvious next question would be What to do when we see an Upthrust. That helps us decide our action. If the next bar is a Downbar closing down it is clear that the weakness and set in and the immediate trend is reversing.
Here again the volume is an important indication. If the volume is high then it time to get out and wait to short. If the volume is low the weakness is not so pronounce and it may be worthwhile to wait and watch next bar movement. Here the spread and the position of Bar also give clues. If the Bar is wide closing down the weakness is more pronounced.
Also if the high of the bar is towards the low of the Upthrust bar the weakness is enhanced. If the down bar is with low volume and closing Up then the weakness of the upthrust bar is still in question. We have to wait for the enxt bar for confirmation. If the Bar after the Upthrust bar is an Upbar closing up then it would mean that the weakness projected by the upthrust is negated. If the stock has been moving up on a high volume and then we encounter a down bar closing down towards low on high volume is a sign of weakness.
Volume need not be very high. Ideally the volume should be higher than the previous two bars. If you look at the enclosed chart the stock was moving up on higher volume. Then we have the down bar closing down near the low. The volume is higher than the previous two bars. Looks like the SM have been distributing.
The next bar looks more like a test for supply. The volume is low and the stock closing up. The low volume indicates. Then again a downbar on higher volume. The weakness is more pronounced now. Though this is their basic definition I have seen subtle difference in the No Demand bar.
But in general any narrow spread low volume Upbar closing in the lower half of the bar indicates No Demand. What does this No Demand Bar indicate? A No Demand bar indicates that there is no support from the SM. The SM is not interested in higher prices and they are not supporting the stock.
Whatever buying or selling is from the stray weak money entering and exiting. Consequently this indicates weakness. The No Demand bar does not indicate any immediate reversal. While analyzing a No demand bar we have to look at the prevailing background. Does the background reflect weakness in terms of Upthrust or Pseudo upthrust? If the background is weakness the No Demand bar indicates enhanced weakness. If the background does not show weakness the No demand bar does show weakness and does not necessarily Indicate reversal.
It only shows lack of participation from SM. We may soon see the SM moving in to take the stock up further. So it would be wait and watch time. Upbars with high volume with narrow spread and closing in the middle or low indicates that supply is swamping the demand. This kind of bars would normally be seen near resistance lines. This by itself does not portend great weakness. But the following bars would indicate whether the supply is persisting or not. Persisting supply would definitely reinforce weakness.
The next bar shows that supply has decreased which encouraged the SM to push further. But the move faltered at the next level. It is quite difficult to code all the VSA condition into indications. So eyeballing the chart becomes quite necessary to come to proper conclusions.
I am not teaching VSA here. I am just sharing a few things I learned and many things are my own interpretations. That way we can arrive at better understanding of VSA. In order to move the stock up the SM has to put in some effort. The effort to move the market up can be seen as wide spread upbars closing near the top with increased volume. The volume would never be excessive.
It is easy to identify these bars. If the effort to move up results in the stock moving up, the effort has yield the desired result. Many times you will find an effort to move up bar and the next bar would be high volume bar closing near the low indicating large supply coming in swamping the demand. So the effort to move up has not yielded the desired result.
These Efforts without result are good indications of weakness. Most of the times you will find the stock moving down or side ways after this failure. This is because the SM would rather wait for the supply to vanish before repeating the effort.
The SM will then test the market for supply before trying to move up further. The repeat move could be good entry points. This is a deviation I have taken from the general VSA concept in my analysis. Testing for Supply: One of the most powerful indication of strength is the Testing for Supply.
After down trend when the SM has accumulated enough and is ready to move the stock up again they test if there is still supply present. Also in an uptrend if the SM encounters large supply they would pause till the supply disappears. Then they would check again to see supply is present. The Testing for supply is done by rapidly marking down the price.
If the stock recovers towards the high and the volume is low it would mean that there was no supply. If the volume is high and if the stock fails to recover it would mean that there still supply present. Low volume or less trading activity indicates a successful test. A TEST bar typically dips into a previous high volume area and recovers to close near the high on low volume.
A test bar viewed in isolation does not signify anything. It necessary to look at the background to ascertain the strength of the Test bar. If there has been absorption volumes just before the Teat bar the strength of the test bar becomes more significant. The next VSA indication we will discuss is called the Stopping volume, also called absorption volume. Normally in a down trend you will see a down bar with high volume bar closing on the upper side.
This is called a Stopping volume. This indicates that the SM is absorbing all the stocks. The SM has decided to start the game all over again and have decided to stop the down tide and start accumulating. As a result the stock will soon see side ways movement or go into a long accumulation phase. In effect the stopping volume or absorption volume indicates that the long bearish move is. An Ideal Stopping Volume bar will be down bar with high volume and closing near the top.
However most of times you would see the close on the upper half of the bar. Stopping volume occurs after long down trend. Stopping volumes are basically alert to the impending reversal. Users of TG will not find this in their software. However I do find it a useful indication. Just like the Upthrust bar we will find in a bearish move a High volume wide range up bar with the low chartering into new lows and the closing will be near the high. This is a good sign of strength returning and you find the trend reversing almost immediately.
The reverse Upthrust is rare and is found rarely at bottoms. Finding the bottom is more difficult than finding the Tops. Most of the time the bottoms will see stopping volumes, some sideways moves and multiple tests before we see a reversal of the trend.
It is also common to see consolidation bases at the bottoms. However these kinds of bar can be seen any where in a down trend. The difficult lies in the recognizing the strength returning after the bottoms. As the name signifies this bar indicates absence of supply and indicates strength. The No Supply bar is a narrow range low volume down bar closing in the lower half. The No Supply bars are found in the early Bottom reversals and indicate strength. It is also common to find these bars in an up trend which are indications of continuation of the trend.
They would also be found on consolidation bases. A No Supply indication has to be read in context with background. At bottom reversal areas they indicate there is no supply available. Then the SM gets ready for mark up. During up moves a No supply could indicate non participation from SM. IMHO this is one of the difficult indication to interpret.
Before we proceed with Support and Resistances with regards to VSA let us look at some basics about support and resistances. The general practice followed by most of us is to draw lines from previous swing Highs and Lows or high and low pivots. Once these lines are they are taken as Support and Resistance lines.. I repeat. It is like assuming that in case of resistances there are a huge numbers of people holding the stocks at this particular price and early waiting sell.
A more reasonable assumption would be that there are many holding the price at and around last swing high. In case if the last swing high was an Upthrust bar the whole range off the bar could become a supply rich area. A swing high can be considered as a resistance only if the price reacts at that level. Till then a swing high remains a swing high. Same is the case for the Supports. Swing lows become swing lows only if the price reacts at these levels. Please feel free to express contrary views if any More on Support and Resistance Later.
An important thing to note here is that the Resistance areas do not represent large supply waiting to be dumped. In the same way the Support areas do not represent a huge demand waiting to lap up all the. It is better to consider the resistance areas are zones where selling pressure increase and support areas represent zones where buying pressure increases.
Now the question is what Resistance and support has to do with VSA? As mentioned earlier the SM generally give due respect to the Resistance and Support areas as they represent zones of Selling pressure and Buying pressure. In general increased volume with increased spread as the stock approaches a resistance area is a bullish sign. Falling volume and decreased spread would mean that stock would be stalled at these areas.
In the same way decreased volume and spread as the stock approaches support area is sign that the stock would take support in that area and reverse. Increased volume and spread would indicate that chances of the stock breaking the support are more. If Resistance areas are crossed with high volume it is a sign of bullishness and if the crossing is with low volumes caution is advice.
In the same way if supports are broken with high volume it is a sign of bearishness and low volume crossing should be viewed with caution. Going short on a low volume break of support could result in a bad trade. These are clearly evident on the charts in terms of high volume wide range bars.
In general it always pays attention to resistance zone even if you are using you own trading systems. When Buy signals are generated near resistance zones one has to be careful. We all use Trend lines and trend line breaks to decide reversals. We will look at trend lines with respect to VSA. The general belief in TA is that Trend lines offer support in up trends and also act as resistances in downtrends.
We will not go into the details of why and how of this belief. Instead we will look at the how volume and spread can give us clues whether the trend line will hold or break. For example we will take an uptrend. When the stock retracts towards the trend line, small spreads and lower volume indicate as the stock approaches the trend line indicates that the stock is likely to be supported by trend line.
Higher volumes and wide spread indicate a probability of a trend line break. Trend lines are resistance areas and effort is needed to break the trend lines. Wide spreads and high volumes are indications of this effort. Many times we will see the SM absorbing the supply near trend lines.
This is a bullish indication as the smart money is bullish on the stock and is interested in higher prices. So when there is lot of supply near trend lines they absorb the supply to keep the prices above the trend line.
Let us look at an example with a chart. B Here the volume is increasing as the prices approach the trend line. This would suggest increased probability of a Trend line break. C We have a bar with increased volume and closing near the low. This bar indicates that there is increased supply. The next bar is an effort to Rise bar. This would mean that the SM is interested to keep up the price and they have absorbed the supply on the previous day.
There seems to general lack of interest on all sides. This are area shows a failed test and no demand bars indicating a general weakness. However volume came in near the trend line and stock is again going up towards the right edge. Reversal and Retracement: One of the difficulties we face when analyze prices is determining whether the stock is going through a reversal or just a retracement. If we assume that a retracement is in progress and it turns out to be a reversal we end up giving away too much.
At the same time if we assume a reversal then we would be out of the trade too soon. These apply specially for positional traders. So how do we get a clue whether it is retracement or a reversal? Following are the basic things one should look at.
Lack of volatility 2. Small spreads 3. Increased Volatility. Large spreads. Especially Effort to Fall bars. Increasing volume. The simplest thing we can do is to draw arrows for the stock movement and the volume. In retracements you will the arrows are in the same direction. And in case of reversal the arrows will be in opposite directions. Just enclosing an example. Tom Williams briefly mentions this in his book. He calls then Trading Ranges though I prefer the term Trend channels as in we will find the stock is actually trending up or down when we look at from a wider view.
This is actually different form the horizontal trading ranges where the stock movement is sideways. Of course I have taken some deviation from his concepts. Many times you will find a stock moving in a upward or downward channel. We can draw upper trend lines and lower trend lines and they would almost be parallel.
Tom Williams divides this channel into upper quarter and lower quarter and most reactions happen in these quarter. He also calls area above the upper trend line or supply line as over bought zone and the area below the lower trend line as over sold zone. The middle area is where we can expect the stock to move anywhere. But I go a step further and I draw a middle line.
The interesting observation here is that it is around this middle or mean line where most we see a conflict or tug of war between the bulls and bears happen and many reactions happen around this line. I call this the Conflict Zone. From a VSA perspective we will find support or strength coming near the bottom trend line. We will also see weakness creeping in in terms of upthurst bars or pseudo upthrust bars near the upper trend line.
In most cases the Trend channel is wide enough to give some nice trade opportunities. The most common recognizable one is the one where the stock moves sideways in a narrow range and the volume has dried up..
However we will also find rectangular bases where the stock moves up and down but restricted within a wider range. You will find weakness coming in at the. Many of the ranges are easily tradable. For a trader or investor with longer term view the idle time to get in would be when the stock bounces back from the support line. This way it the stock breakout he would have the idle entry point. He also has the option to quit at the stock fails to cross the resistance at the range top, For a short term trader who is adapt in trading the long and short this kind of base provides good opportunities to go long at the support line and go short at the top of the range.
Just like the Trend channels described before we can find a zone in the middle of the range which I call the conflict zone where many reactions take place. Here is just an example of tradable base. More tradable bases will be covered in my other threads. Price includes consideration of individual candlestick configurations as well as the pattern, or. Technical Analysis Fibonacci Levels Retracements A retracement is a pullback within the context of a trend. Dip After a rise from 0 to 1, short term market participants start to take profit.
This drives. While the methods described are believed. Share of ownership in a company Publicly traded Holds monetary value. It is important that investors. Timing the Trade How to Buy Right before a Huge Price Advance By now you should have read my first two ebooks and learned about the life cycle of a market, stock, or ETF, and discovered the best indicators. Chapter 1. When most people think about trading Forex, they think about watching price movements flash by them on the.
Stochastic Oscillator. By Jay Lakhani www. Lane observed that as prices rise. The following is provided by www. ProTrader Table of Contents 1. Areas A. Fibonacci Confluence. With custom strategies,. The Stock Breakout Profits is a complete trading strategy for trading not only the. Schroeder In the Richard D.
Wyckoff method on stock market science and techniques, the fourth step of his approach is explained thus: Determine each stock's. Secrets for profiting in bull and bear markets Sam Weinstein 1. Check market indicators for overall direction 2. Scan the industry groups to know which one to zero in 3. Cull out the stocks with the most. It does, however, rely heavily on them and often uses chart patterns to assist in making. Chapter 2. However, from time to time those charts may be speaking a language you.
Imagine being able to take 20 minutes each day to trade. No surprise given the tragedies that befell many. Livermore's own wife assumed that they had lost everything again, and had removed all the furniture and her jewellery from their 23 bedroom house, fearing the arrival of the bailiffs at any moment. It was only when he arrived home from his office that evening, he calmly announced to her that in fact this had been his most profitable day of trading, ever. For these iconic traders, the ticker tape was their window on the world of the financial markets.
Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are neglected by the large interests. The Tape Reader aims to make deductions from each succeeding transaction — every shift of the market kaleidoscope; to grasp a new situation, force it, lightning-like, through the weighing machine of the brain, and to reach a decision which can be acted upon with coolness and precision.
It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all. A Tape Reader is like the manager of a department store; into his office are poured hundreds of reports of sales made by various departments.
He notes the general trend of business — whether demand is heavy or light throughout the store — but lends special attention to the lines in which demand is abnormally strong or weak. As traders, surely this is all we need to know! Originally developed in the mid 's as a telegraphic system for communicating using Morse code, the technology was adapted to provide a system for communicating stock prices and order flow.
These then appeared on a narrow paper tape which punched out the numbers throughout the trading day. Below is an original example of what these great traders would have used to make their fortunes. Hard to believe perhaps, but what appears here is virtually all you need to know as a trader to succeed, once you understand the volume, price, trend and time relationship.
Fig 1. The ticker tape, constantly clattering out its messages of market prices and reactions to the buying and selling, the supply and demand. All the information was entered at the exchanges by hand, and then distributed to the ticker tape machines in the various brokerage offices.
A short hand code was developed over the years, to try to keep the details as brief as possible, but also communicate all the detailed information required. Below on the second line were printed all the prices and trading volumes, all in a short hand form to try to speed up the process. Finally, zeros were frequently left off quotes, once again for speed. So shares, but on such a day, was the price still , or had it fallen to or even , as many shares did.
This then was the tape, that all these iconic traders came to know and understand intimately. Once they had learnt the language of the ticker, the tape had a story to tell, and one simply based on price and volume.
For their longer term analysis, they would then transfer all this information across to a chart. What has changed since? Well, the honest answer is actually very little. We are fortunate in that our charts are electronic. All the price action and volume is delivered to us second by second, tick by tick, but just to prove that the ticker and its significance still remain, below is a more modern version of the same thing. The only difference is that this is electronic, but the information this portrays is the same.
And what do we see here in this very simple example in Fig 1. What we don't know at this stage is the time between these price changes, and whether the volumes for this instrument are low, above average or high. All key factors. Whilst the two look similar, there is one HUGE difference, and that was in the timeliness of the information being displayed.
For the iconic traders of the past, it is even more extraordinary to think that they managed to succeed despite the delays in the data on the ticker tape, which could be anything from a few minutes to a few hours out of date. Today, all the information we see is live, and whether on an electronic ticker, an electronic chart, or in an on screen ticker with level 1 and level 2 data, we are privileged to have an easy life when trading, compared to them. Richard Ney was born in , and after an initial career in Hollywood, transitioned to become a renowned investor, trader and author, who exposed the inner workings of the stock market, as well as the tacit agreements between the regulatory authorities, the government, the exchanges and the banks, which allowed this to continue.
In this respect he was similar to Wyckoff, and as an educator saw his role of trying to help the small investor understand how the game was rigged on the inside. Operations are controlled for the benefits of the insiders who have the special information and the clout to profit from all sorts of transactions, regardless of the actual value of the stock traded. The investor is left out or is an extraneous factor. The actual value of the listed stock is irrelevant.
The name of the game is manipulation. No wonder Richard Ney was considered a champion of the people. His books are still available today and just as relevant. Because everything that Richard Ney exposed in his books, still goes on today, in every market, and let me say here and now, I am not writing from the standpoint of a conspiracy theorist. I am merely stating a fact of trading life.
Every market that we either trade or invest in is manipulated in one way or another. Whether covertly by the market makers in equities, or in forex by the central banks who intervene regularly and in some cases very publicly. However, there is one activity that the insiders cannot hide and that is volume, which is why you are reading this book. Volume reveals activity. Volume reveals the truth behind the price action. Volume validates price.
Let me give you one final quote from The Wall Street Gang, which I hope will make the point, and also lead us neatly into the next chapter. When they clear their shelves of their inventory they will seek to employ their profits to buy more merchandise at wholesale price levels. Once we grasp this concept we are ready to posit eight laws: 1. As merchants, specialists will expect to sell at retail what they have bought at wholesale.
The longer the specialists remain in business, the more money they will accumulate to buy stock at wholesale, which they will then want to sell at retail. The expansion of communications media will bring more people into the market, tending to increase volatility of stock prices as they increase elements of demand-supply. In order to buy and sell huge quantities of stock, Exchange members will seek new ways to enhance their sales techniques through use of the mass media.
In order to employ ever increasing financial resources, specialists will have to effect price declines of ever increasing dimensions in order to shake out enough stock. Advances will have to be more dramatic on the upside to attract public interest in order to distribute the ever increasing accumulated inventories.
The most active stocks will require longer periods of time for their distribution. The economy will be subjected to increasingly dramatic breakdowns causing inflation, unemployment, high interest rates and shortages of raw materials. He was the scourge of the SEC, and the champion of the small speculator and investor.
Therefore, volume reveals the truth behind the numbers. Whether you are trading in manipulated markets such as stocks or forex, or ones such as futures where we are dealing with the major operators, volume reveals that manipulation and order flow in stark detail. The market makers in stocks cannot hide, the major banks who set exchange rates for the foreign exchange markets, cannot hide. In the futures markets, which is a pure market, volume validates price and gives us a picture of supply and demand coupled with sentiment and the flow of orders as the larger operators move in and out of the markets.
In the next chapter we are going to look at volume in more detail, but I am going to start with an article I wrote for Stocks and Commodities magazine, many years ago, and which echoes the eight laws of Richard Ney. It was written long before I came across Richard and his books, but the analogy is much the same and I include it here, to further reinforce the importance of volume in your trading. I hope so. Chapter Two Why Volume? The key is having more information than the other guy — then analyzing it right and using it rationally.
Warren Buffett This is the article that I wrote for Stocks and Commodities magazine many years ago. I called it the Parable of Uncle Joe. I have made some minor changes, but the essence of the article remains, as originally published. One day after a particularly bad trading day, my Uncle Joe took me aside and consoled me with some hard facts about how the markets really work.
And he told me this story. You see, my Uncle Joe owns a unique company, which has given him an insider's perspective on how stock price movement is managed. It has been buying and selling its unique widgets for many years.
These widgets have an intrinsic value, they never break, and the number in circulation at any one time is much the same. Being a reasonably clever man with many years of experience managing his business, my uncle soon realised that just buying and selling his widgets to customers was, in fact, rather dull.
The amount of money he made each time he bought and sold was quite small, and the number of transactions per day was also low. In addition, he also had all the running expenses of his office, his warehouse and his staff. Something would have to be done. Having given the problem some thought, he wondered what would happen if he mentioned to a neighbour that widgets could soon be in short supply. He also knew from checking his warehouse, that he had enough stock to meet any increased demand should his plan be successful.
The following day he met his neighbour outside, and casually mentioned his concerns, begging the man to keep it to himself. His neighbour assured him that he wouldn't breathe a word; his lips were sealed. Several days passed and widget sales remained flat. However, after a week or so, sales started to pick up with more customers coming to the warehouse and buying in larger quantities.
It seemed his plan was starting to work and everyone was happy. His customers were happy as they knew that widgets would soon be in short supply, and so their value would increase. Uncle Joe was happy because he was selling more widgets, and making more money every day. Then he started to think. With everyone buying his widgets, what would happen if he raised his prices?
After all, he was the only supplier and demand was high at the moment. The following day he announced a price increase, but still believing there would soon be a widget shortage, his customers continued to buy in ever larger quantities! As the weeks passed he gradually increased his prices higher and higher, but still the buying continued. A few of his more astute customers started to sell their widgets back to him, taking their profits, but Uncle Joe didn't mind as he still had plenty of willing buyers.
This was all good news for Uncle Joe, until one day, he suddenly realised with some alarm that his warehouse was now looking very empty indeed. He also started to notice that the volume of sales each day was decreasing.
He decided to keep moving prices up, so everyone would think that the situation was unchanged. But now he had a new problem. His original plan had been too successful. How on earth was he going to persuade all his customers to sell widgets back to him, so that he could continue in business? He pondered this problem for several days with no clear solution. Then, quite by chance, he met his neighbour again in town. The man drew him to one side and inquired whether the rumour he had heard was true?
Inquiring into what that rumour might be, Uncle Joe learned that his neighbour had heard that another, much bigger widget distribution company was setting up business in the area. Being clever, Uncle Joe realised that providence had given him the answer on a plate.
Appearing crestfallen, he admitted that the rumour was true, and that his business would suffer badly. More importantly, widget values were likely to drop dramatically in price. As they parted company, Uncle Joe chuckled to himself at having such good fortune, and such a helpful gossip for a neighbour. Within days he had queues of customers outside his warehouse doors, begging him to buy back their widgets. With so many people selling, he dropped his prices quickly, making people even more desperate to sell before their widgets became worthless!
As the prices fell further, more and more people cracked under the pressure. Uncle Joe was now buying back an enormous volume of widgets. After several weeks the panic selling was over, as few people had been brave enough to hold out under the pressure. Uncle Joe could now start to sell widgets again at their old levels from his warehouse full of stock.
He didn't mind if it was quiet for a few months, as he has made a great deal of money very quickly. He could afford to take it easy. His overhead expenses were covered and he could even pay his staff a healthy bonus. Everyone soon forgot how or where the rumours had started and life returned to normal.
Normal that is until Uncle Joe started thinking one day. I wonder if we could do that again? Uncle Joe's story is of course fiction. It was written before I discovered the work of Richard Ney, but it is interesting that we both use the same analogy to describe the insiders, the specialists, or what most people call the market makers. It is my view, and of Richard Ney that this is one of the great ironies of the financial markets. Whilst insider dealing by individuals on the outside is punished with long prison sentences and heavy fines, those on the inside are actively encouraged and licensed to do so.
The problem for the exchanges and governments is that without the market makers, who are the wholesalers of the market and provide a guarantee of execution of the stock, the market would cease to function. When we buy or sell in the cash market, our order will always be filled.
This is the role of the market maker. They have no choice. It is their remit to fulfil all orders, both buying and selling and managing their order books, or their inventory accordingly. As Ney said himself, the market makers are wholesalers, nothing more, nothing less.
They are professional traders. They are licensed and regulated and have been approved to 'make a market' in the shares you wish to buy and sell. They are usually large international banking organisations, generally with thousands or tens of thousands of employees worldwide.
Some of them will be household names, others you will never have heard of, but they all have one thing in common - they make vast amounts of money. What places the market maker in such a unique position, is their ability to see both sides of the market. In other words, the supply and demand. The inventory position if you like. Just like Uncle Joe, they also have another huge advantage which is to be able to set their prices accordingly.
Now, I don't want you to run away with the idea that the entire stock market is rigged. It isn't. No single market maker could achieve this on their own However, you do need to understand how they use windows of opportunity, and a variety of trading conditions to manipulate prices.
They will use any, and every piece of news to move the prices, whether relevant or not. Have you ever wondered why markets move fast on world events which have no bearing. Why markets move lower on good news, and higher on bad news? The above explanation is a vast over simplification but the principle remains true.
In addition, in the same article the US exchanges are very keen to increase the number of companies who can act as market makers. But, other than this, not much has changed since the days of Richard Ney. Do these companies then work together? Of course they do! It goes without saying. Do they work in an overt way? What they will all see, is the balance of supply and demand in general across the markets and specifically in their own stocks.
If the specialists are all in a general state of over supply, and a news story provides the opportunity to sell, then the market markers will all act pretty much in unison, as their warehouses will all be in much the same state. It really is common sense once you start to think about the markets in this way. On the London Stock Exchange there are official market makers for many securities but not for shares in the largest and most heavily traded companies, which instead use an electronic automated system called SETS.
However, you might ask why I have spent so much time explaining what these companies do, when actually you never see them at all. The answer is very simple. As the 'licensed insiders', they sit in the middle of the market, looking at both sides of the market. They will know precisely the balance of supply and demand at any one time. Naturally this information will never be available to you, and if you were in their position, you would probably take advantage in the same way.
The only tool we have at our disposal to fight back, is volume. We can argue about the rights and wrongs of the situation, but when you are trading and investing in stocks, market makers are a fact of life. Just accept it, and move on. Volume is far from perfect. However, it is the best tool we have with which to see ' inside the market' Volume applies to all markets and is equally valuable, whether there is market manipulation or not.
Volume in the futures market, which is the purest form of buying and selling reveals when the market is running out of steam. It reveals whether buying interest is rising or falling on a daily basis. It reveals all the subtleties of pull backs and reversals on tick charts and time charts from minutes to hours.
Volume is the fuel that drives the market. Volume reveals when the major operators are moving in and out of the market. Without volume, nothing moves, and if it does move and the volume is not in agreement, then there is something wrong, and an alarm bell rings!
For example, if the market is bullish and the futures price is rising on strong and rising volume, then this is instantly telling us that the price action is being validated by the associated volume. The major operators are buying into the move. Equally, if the market is falling and the volume is rising, then once again volume is validating price. It really is that simple. These principles apply whatever the market, whether it is bonds, interest rates, indices, commodities or currencies.
What you will discover in this book is that the analysis of price and volume applies to every market, manipulated or otherwise. In the manipulated cash markets of stocks, it provides you with the ultimate weapon to avoid being suckered in by the market makers. In the futures markets, it gives you the ultimate weapon to validate price, and to reveal the true market sentiment of buyers and sellers and to take action as the reversals in trend are signalled using volume.
Here, we are following the major operators who will have the inside view of the market. In the spot forex market we have a different problem. There is no true volume reported. Even if there were, would this be shown as trade size, or 'amounts of currency' being exchanged. However, tick volume is not perfect, nothing is in trading. First, the tick volumes on one platform will vary from the tick volumes on another, since tick data will be provided through the platform of an online broker.
Nevertheless, a quality FX broker will normally provide a quality feed. But, is tick data valid as a proxy for volume? After all, volume is really activity, and in this sense can be reflected in price, since tick data is simply changes in price. So, if the price is changing fast, then does this mean that we have significant activity in the market?
In my opinion the answer is yes. To prove this point, we only need to watch a tick chart prior to, and just after a significant news release. Take the monthly Non Farm Payroll, which every forex trader knows and loves! Assume we are watching a tick chart. Prior to the release each tick bar may be taking a few minutes to form. During the release and immediately after, each bar is forming in seconds, appearing as if being fired onto the screen using a machine gun!
A chart that has taken an hour to fill with bars, is now a full frame within minutes. This is activity, pure and simple, which in turn we can assume is representative of volume. There will always be market manipulation in the spot forex market. In many ways it is the most widely manipulated of all. We only have to consider the currency wars as evidence of this, but as traders, tick volume is what we have, and tick volume is what we use.
Whilst it isn't perfect, I can guarantee you one thing. You will be considerably more successful using it, than not, and you will see why, once we start to look at the charts themselves across all the various markets. If you are still not convinced?
Let me give you an analogy, not perfect I accept, but which I hope will help. It is a cold, wet and miserable day in the middle of winter, and the auction room is in a small provincial town. The auction room is almost empty, with few buyers in the room. The auctioneer details the next item, an antique piece of furniture and starts the bidding with his opening price.
Now imagine the same item being sold in a different scenario. This time, the same item is being sold, but the auction house is in a large capital city, it is the middle of summer and the auction room is full. The auctioneer details the next piece which is our antique furniture, and opens the bidding with a price.
The price moves quickly higher, with bidders signalling interest in the auction room, and phone bidders also joining in. Eventually the bidding slows and the item is sold. In the first example, the price changed only once, representing a lack of interest, and in our terms a lack of bidders in the room, in other words volume. In the second example the price changed several times and quickly with the price action reflecting interest, activity and bidders in the room.
In other words volume. In other words, the linkage between activity and price is perfectly valid. Activity and volume go hand in hand, and I hope that the above analogy, simple and imperfect as it is, will convince you too.
The above simple analogy also highlights three other important points about volume. The first is this. All volume is relative. Suppose for example this had been our first visit to this particular auction room. Is the activity witnessed average, above average or below average. We would not be able to say, since we have no yardstick by which to judge.
If we were a regular visitor, then we could judge instantly whether there were more or less attendees than usual, and make a judgement on likely bidding, as a result. This is what makes volume such a powerful indicator. As humans we have the ability to judge relative sizes and heights extremely quickly, and it is the relative aspect of volume which gives it such power. Unlike the tape readers we have a chart, which gives us an instant picture of the relative volume bars, whether on an ultra fast tick chart, an intra day time chart, or longer term investing chart.
It is the relationship in relative terms which is important. The second point is that volume without price is meaningless. Imagine an auction room with no bidding. Remove the price from the chart, and we simply have volume bars. Volume on its own simply reveals interest, but that interest is just that, without the associated price action. It is only when volume and price combine that we have the chemical reaction which creates the explosive power of Volume Price Analysis. Third and last, time is a key component.
Suppose in our auction room, instead of the bidding lasting a few minutes, it had lasted a few hours if allowed! What would this tell us then? That the interest in the item was subdued to say the least. Hardly the frenetic interest of a bidding war.
To use a water analogy. Imagine that we have a hosepipe with a sprinkler attached. The water is the price action and the sprinkler is our 'volume' control. If the sprinkler is left open, the water will continue to leave the pipe with no great force, simply falling from the end of the pipe. However, as soon as we start to close our sprinkler valve, pressure increases and the water travels further.
We have the same amount of water leaving the pipe, but through a reduced aperture. Time has now become a factor, as the same amount of water is attempting to leave the pipe in the same amount of time, but pressure has increased.
It is the same with the market. As you are probably aware, or will not doubt find out when you begin trading, there are several free 'volume' indicators, and many proprietary systems you can buy. Whether free or paid, all have one thing in common. When I finished my two weeks with Albert, I then spent the next 6 months just studying charts, and learning to interpret the price and volume relationship. I would sit with my live feed and my two monitors, one for the cash market and the other for the equivalent futures market, watching every price bar and the associated volume and using my knowledge to interpret future market behaviour.
This may not be what you want to read. And some of you may be horrified at how labour intensive this all sounds. However, just like Wyckoff, I also believe there are no short cuts to success. Technical analysis, in all its aspects is an art, and interpreting the volume price relationship is no different.
It takes time to learn, and time to be quick in your analysis. However, just like the tape readers of the past, once mastered is a powerful skill. The technique is a subjective one, requiring discretionary decision making. It is not, and never will be, one that lends itself to automation. If it were, then this book would simply be more fuel for the fire.
Finally, and I hope you are still reading and have not been put off by the above statements , one further aspect of volume is whose perspective are we using when we talk about buying and selling. Are we talking from a wholesalers perspective or from the retail perspective. So, let me explain. As investors or speculators the whole raison d'etre for studying volume is to see what the insiders, the specialists are doing.
For the simple reason that whatever they are doing, we want to follow and do as well! The assumption being, implied or otherwise, is that they are likely to have a much better idea of where the market is heading. This is not an unreasonable assumption to make. So, when the market has moved sharply lower in a price waterfall and a bearish trend, supported by masses of volume, this is a buying climax.
It is the wholesalers who are buying and the retail traders who are panic selling. A buying climax for us represents an opportunity. Likewise, at the top of a bull trend, where we see sustained high volumes, then this is a selling climax. So remember, when I write about volume throughout the remainder of this book, buying and selling is always from a wholesalers perspective as this is the order flow that we ALWAYS want to follow.
Now in the next chapter we're going to move on to consider the other side of the equation, which is price. As I said in chapter one, Volume Price Analysis has been around for over years. The same is true when we consider the analysis of price, and the only representation of price which truly changed how traders studied and analysed charts was in the introduction of candlestick charts in the early 's.
Fads come and go in trading. Something that was in 'vogue' a few years ago, is no longer considered valid, and some 'new' approach is then promoted. One approach which is being marketed heavily at the moment is 'price action trading' or PAT. This is as it sounds. Trading using an analysis of price, with no or very few indicators, which I find strange. And my reasons are as follows.
Imagine suggesting to Jesse Livermore, Charles Dow, Richard Wyckoff, and Richard Ney, that we had devised a new and exciting way to analyse the markets. I'm sure Jesse and the others would have been struck dumb at such a suggestion. But don't worry. In this book I explain price action trading, which is then validated with volume.
So you get two approaches for the price of one here! Now that's what I call value for money!! However, I digress. As a frequent visitor to this part of London, I would often drive past this exchange, and at any time during the day, would see the traders in their different brightly coloured jackets, dashing out to grab coffees and sandwiches before rushing back to the floor of the exchange.
Without exception these were generally young men, loud and brash, and in fact on the corner of Walbrook and Cannon Street there now stands a bronze statue of a floor trader, mobile phone in hand. These were the days of fast cars, and aggressive trading, and it was ironic that this was the world where I started my own trading career, with FTSE futures orders filled on the floor of the exchange.
This was the world of adrenaline pumped traders, yelling and screaming using unintelligible hand signals, buying and selling in a frenetic atmosphere of noise and sweat. It was positively primordial where the overriding emotion emanating from the floor was fear, and obvious to anyone who cared to view it from the public gallery.
However, the advent of electronic trading changed all of this, and the LIFFE exchange was one of many casualties. All the traders left trading and moved away from the pit, and onto electronic platforms. The irony is, that most of the traders, and I have spoken to many over the years, failed to make the transition from pit trading, to electronic trading, for one very simple reason.
A pit trader, could sense not only the fear and greed, but also judge the flow of the market from the buying and selling in the pit. In other words, to a pit trader, this was volume or order flow. This is what a pit trader saw and sensed every day of the week, the flow of money, the weight of market sentiment, and the trading opportunities that followed as a result.
In other words, they could 'see' the volume, they could see when the big buyers were coming into the market and ride on their coat tails. This is the equivalent of volume on the screen. However, without being able to see, judge, and feel the flow in the pit, most of these traders failed to make a successful transition to screen trading. Some succeeded, but most were never able to make that move, from an environment where price action was supported by something tangible.
Pit trading still continues today, and if you do get the chance to view it in action, I would urge you to go. Once you have seen it for real, you will understand why volume is so powerful in supporting price, and why I believe the exponents of PAT are simply promulgating something different for the sake of it. Whilst it is undoubtedly true to say that price action encapsulates all the news, views and decisions from traders and investors around the world, and that with detailed analysis we can arrive at a conclusion of future market direction, without volume we have no way of validating that price analysis.
Volume gives us our bearings, it allows us to triangulate the price action and to check the validity of our analysis. This is what the pit traders of old were doing — they would see a price move, validate it by considering the order flow in the pit, and act accordingly. For us, it is the same. We simply use an electronic version of order flow which is the volume on our screens.
But, let me give you another example. Returning to our auction again, only this time there is no physical sale room. Instead we are joining an online auction, and perhaps now you can begin to imagine the problems that the ex pit traders encountered. We have moved from the physical sale room, where we can see all the buyers, the number of people in the room, the phone bids and the speed of the bidding.
In a physical sale room we also get a sense of where the price starts to pause. We see bidders become fearful as the price approaches their limit and they hesitate with the next bid, just fractionally, but enough to tell you they are near their limit. This is what the pit traders missed.
In an online auction we are logged in and waiting for the auction to start. An item we want to buy appears and we start bidding. We have no idea how many other bidders are there, we have no idea if we are playing on a level playing field.
All we see is the price being quoted. The auctioneer, for all we know, could be taking bids 'off the wall' fake bids in other words which happens more often than many people think. Meanwhile back to our online auction. We continue bidding and eventually win the item. But, have we got our item at a good price? And, in this scenario we are only referring to price and not value, which is a very different concept. Besides, I hope by now, you are beginning to get the picture.
In the online auction all we see is price. Furthermore, the great iconic traders of the past would have given us their answer, and it would have been a very emphatic NO. Once again I accept it is an imperfect example, but one which I hope makes the point. To me, a price chart with no volume is only part of the story.
Price does encapsulate market sentiment at a given and precise moment in time, but with so much market manipulation prevalent in so many markets, why ignore such a valuable tool which is generally provided free. Whilst price is a leading indicator, in itself, it only reveals what has gone before, from which we then interpret what is likely to happen next.
Whilst we may be correct in our analysis, it is volume which can complete the picture. In a manipulated market, volume reveals the truth behind the price action. In a pure market, volume reveals the truth behind market sentiment and order flow. So, let's take a closer look at price, and in particular the effect that changes in technology have had on the four principle elements of a price bar, the open, the high, the low and the close.
And the most significant change in the last few years has been the move to electronic trading, which has had the most profound effect on two elements of the four, namely the opening and closing prices. Scroll back to the days of Ney and earlier, and the markets in those days only traded during a physical session. The market would open when the exchange opened, and close when the exchange closed at a prescribed time. This gave the opening and closing prices great significance, particularly on the open and close of the day.
The opening price would be eagerly awaited by traders and investors and, as the closing bell approached, frenetic trading activity would be taking place as traders closed out their end of day positions. This is now generally referred to as regular trading hours RTH , and is the time the exchange is physically open. Whilst this principle still applies to stock markets around the world, with the NYSE trading from 9.
The platform that really changed the game was Globex, introduced by the CME in , since when virtually every futures contract can now be traded 24 hours a day. Whilst the cash markets, such as stocks, are restricted to the physical time set by the exchange, what has changed, certainly with regard to this market, has been the introduction of electronic index futures, which now trade around the clock.
What this means, in effect, is that the opening and closing prices of the cash market are now far less important than they once were. The reason is simply the introduction of Globex, as electronic trading has become the standard for index futures, which are derivatives of the cash market indices.
With these index futures now trading overnight through the Far East and Asian session, the open of the cash index is no longer a surprise with the futures signalling overnight market sentiment well in advance. By contrast, in the days before the advent of electronic trading, a gapped open, up or down, would have given traders a very strong signal of market intent. Whereas today, the open for the major indices is no longer a great surprise as it is forecast by the overnight futures markets.
Whilst it is certainly true to say that individual stocks may well react for a variety of reasons to sentiment in the broad index, generally all boats tend to rise on a rising tide, and therefore likely to follow suit. The same could be said of the closing price. When the physical exchange closes, stocks are closed for the day in the cash markets, but electronic trading continues on the index future and moves on into the Far East session and beyond.
This facet of electronic trading also applies to all commodities, which are now traded virtually 24 hours a day on the Globex platform, and both currency futures, and currency spot markets also trade 24 hours a day. The electronic nature of trading is reflected in the price chart.
Twenty years ago, gap up or gap down price action would have been the norm, with the open of a subsequent bar closing well above or below the close of the previous bar. These were often excellent signals of a break out in the instrument, particularly where this was confirmed with volume. Such price action is now rare, and generally restricted to the equity markets, which then catch up when the physical exchange opens the next day. Virtually every other market is now electronic such as the spot forex market, and as we have just seen, indices catch up with the overnight futures as do commodities and other futures contracts.
The open of one bar will generally be at exactly the same price as the close of the previous bar, which reveals little. This is one of the many effects that electronic trading is now having on price action on the charts, and is likely to continue to have in the future.
Electronic trading is here to stay, and the significance of these elements of price action in various markets will change as a result. If the market is running 24 hours a day, then the open of one bar will simply follow the close of the previous bar, until the market closes for the weekend. From a price action trading perspective, this gives us little in the way of any valid 'sentiment' signals, which makes volume even more relevant in today's electronic world — in my humble opinion at any rate!
However, let's take a look at an individual bar in more detail, and the four elements which create it, namely the open, the high, the low and the close, and the importance of these from a Volume Price Analysis perspective. This is what Albert taught all those years ago, and it is how I learnt. I have tried bar charts and thought I could dispense with candles. However, I have returned to candles and do not plan to use any other system, for the foreseeable future.
I do understand that some traders prefer to use bars, line charts, Heikin Ashi, and many other. However, my apprenticeship in Volume Price Analysis was with candlesticks and I believe its true power is revealed when using this approach. I hope, by the end of this book you too will agree.
Therefore, I want to start by dissecting a typical candle and explain how much we can learn from it. In any candle, there are seven key elements. The open, high, low and close, the upper and lower wicks and the spread as shown in Fig 3. Whilst each of these plays a part in defining the price action within the time frame under consideration, it is the wicks and the spread which are the most revealing in terms of market sentiment, when validated with volume.
Fig 3. The image in Fig 3. However, the price action could have taken a different journey in creating this candle. A wide spread between the open and the close indicates strong market sentiment, either bullish or bearish, depending on whether the closing price finished above the opening price or below it.
A narrow spread between the open and the close indicates sentiment which is weak. There is no strong view one way or the other. A change in sentiment during the session. After all, if the sentiment had remained firm throughout, then we would have no wicks at all.
This is the equivalent of our online auction, or physical auction, where the price opens at one level, and closes at a higher level once sold. The price action would simply create a solid candle with no wick to the top or the bottom, and in the context of trading, suggesting strong and continued sentiment in the direction of the candle.
This is the power of the wicks and why, when used in combination with the spread, reveal so much about true market sentiment. It forms the basis of price action trading, which is perfectly valid in it's own right. However, why stop at this point and refuse to validate that price action with volume? This is something I simply cannot understand and perhaps any PAT traders reading this book can convince me otherwise.
Just drop me an email as I am always happy to learn. So, as you can see, the length and context of the wick, whether to the upside or the downside is paramount in Volume Price Analysis, and the easiest way to explain this is to consider some further visualisation examples, which will help to make the point. Here we have a wick where the price has opened, the market has moved lower, and then recovered to close back at the open price.
In the second example in Fig Let's analyse what's happening here with the price action and market sentiment. In both cases we can be certain that this is the profile of the price action, since the closing price has returned to the original opening price. So there is no guesswork. It is true that within the price action, there may have been ups and downs, pull backs and reversals, but at some point in the session, the price action hit a low, or a high and then returned to the original starting point.
Perhaps within the move lower, there were pauses and brief attempts to rally, which would have been seen perhaps in faster time frames, and a key part of trading. At some point during the course of the session, the buyers started to come back into the market, wrestling control from the sellers as the market price had now become an attractive buying proposition.
Now it's the turn of the sellers to be under pressure, as more and more buyers flood into the market, overwhelming the sellers and taking the price back higher once again, to finally close at the opening price. But, what does this price action reveal? And the answer is two very important things. First, that in this session, whatever the time frame may have been, there has been a complete reversal in market sentiment.
Second, that the sentiment on the close of the bar is bullish — it has to be, since we know that the price action closed at the open, so at the instant of closure, the price must have been rising, supported by all the buying pressure underneath. Does this mean that this is signalling a reversal in any trend?
The short answer is no, and you will discover why once we start looking at volume, which will then give us the complete picture. In this case the spread was zero, which is JUST as significant as any large spread of the candle. I hope that the above example has helped to explain what is happening 'inside' the candle with the associated price action. Nevertheless, the principle holds good. This now brings me on to another area of volume analysis which we are also going to consider later in the book.
Whilst VPA focuses on the 'linear relationship' between volume and price once the candle has closed, VAP focuses on the volume profile during the creation of the price bar. In other words, 'where' has the volume been concentrated within the associated price action. We could say that VPA is our big picture of the volume price relationship on the outside of the candle, whilst VAP gives us the detail of the volume profile, 'inside' the candle.
This helps to give us an additional perspective on our 'outside' view — two views of the same thing, but from different perspectives, with one validating the other. A further triangulation of the volume and price relationship. Now let's look at our other example, which was the upper wick example.
However, as the session develops the price action reaches a point at which the buyers are beginning to struggle, the market is becoming resistant to higher prices and gradually the sellers begin to regain control. Finally, at the high of the session, the buyers run out of steam and as the sellers come into the market, the buyers close out their profits.
This selling pressure then forces prices lower, as waves of sellers hit the price action. The candle closes back at the open price and the session closes. Once again, there are two key points with this price behaviour which are fundamental. First, we have a complete reversal in market sentiment, this time from bullish to bearish. Second, the sentiment at the close is bearish, as the open and closing price are the same.
Again, this is a stylised view of the price behaviour. Nevertheless, this is what has happened over the session of the candle, and it makes no difference as to what time frame we are considering. This could be a candle on a tick chart, a 5 minute chart, a daily chart or a weekly chart, and this is where the concept of time comes into play.
This type of price action, accompanied with the correct volume profiles, is going to have a significantly greater effect when seen on a daily or weekly chart, then when seen on a 1 minute or 5 minute chart. This is something we will cover in more detail in the next few chapters. But, what does this price action look like on a price chart in candle form? Price action and volume then tell us where the market is likely to go next. And here is another, equally powerful candle. After all, we can now visualise the buying and the selling simply from the price action of the wick on the candle.
But what of course this does NOT reveal, is the strength of this price action, and perhaps even more importantly, whether this price action is valid. This is why I feel price action trading only tells half the story. It is volume which completes the picture. And in the next chapter we start to consider volume from first principles. Chapter Four Volume Price Analysis — First Principles [On the continual learning in share investing] Wherever learning curves begin in this mercurial business, they never seem to end.
John Neff In this chapter I want to start with some basic tenets for Volume Price Analysis VPA, but first of all, let me set out what I believe are the guiding principles in order to be consistently successful as a trader using this approach. I must stress, these are the principles I use every day, and have been developed over 16 years, since I first started using this technique based on Albert's teaching.
Despite the cost and surreal experience, I am eternally grateful to Albert for setting me and my husband David on the right trading road. And I hope this book will do the same for you. Now, these are not rules, but simply guiding principles to help to put the rest of what you are about to learn into context. And just as an aside, for the remainder of the book I will be referring to Volume Price Analysis as VPA — it's quicker and easier for you, and for me!
Moreover, it is not a technique that lends itself easily to automation or software. Although it does take a little while to become proficient, you will be rewarded for your effort and time. It can then be applied to any instrument in any market in any time frame. The reason software does not work with VPA, is simply that most of the analysis is subjective. You are comparing and analysing price behaviour against the associated volume, looking for confirmations or anomalies, whilst at the same time, comparing volume to judge its strength or weakness in the context of volume history.
A software program, does not have any subjectivity in its decision making. Hence it can never work. The other advantage is that once you have learnt this technique, it is effectively free to use for life! The only cost is any data feed you may need for the live volume, and your investment in this book!
Principle No 2 : Patience This principle took me some time to learn, so I hope that I can save you a huge amount of wasted effort here. The financial market is like a super tanker. It does not just stop and turn on a dime or sixpence. The market always has momentum and will almost always continue beyond the candle or candle pattern which is signalling a potential reversal or an anomaly. When I first started, I always became very excited whenever I saw a trading signal, and would enter a position immediately, only to see the market continue on for a while before the signal was validated with the market duly changing course.
The reason for this is very simple to understand once you begin to think about what is happening in each price bar, and in terms of the reality of the market. So, let me use an analogy here to help illustrate this point. The analogy is of a summer shower of rain. The sun is shining, then there is a change, the clouds blow in, and in a few minutes the rain begins to fall, lightly at first, then heavier, before slowing again, and finally stopping. After a few minutes the sun comes out again, and starts drying up the rain.
This analogy gives us a visual picture of what actually happens when a price reversal occurs. Let's take an example of a down trend where the market has been selling off over a period of several down candles. At this point we begin to see signs of potential buying coming into the market.
The sellers are being overwhelmed by the buyers. However, they are NOT all overwhelmed immediately within the price action of the candle. Some sellers continue to hang on, believing that the market is going to move lower. The market does move a little lower, but then starts to tick higher and some more sellers are frightened out of the market.
The market then drops back lower once again, before recovering, and in doing so shakes out the more obstinate sellers. Finally, the market is ready to move higher having 'mopped up' the last dregs of selling. As I said before, the market never stops dead and reverses. This is where price support and resistance become so powerful, and which are also a key element of VPA. The moral here is not to act immediately as soon as a signal appears.
Any signal is merely a warning sign of an impending change and we do have to be patient. When a shower of rain stops, it doesn't stop suddenly, it gradually peters out, then stops. When you spill something, and have to mop it up with some absorbent paper, the 'first pass' collects most of the spill, but it takes a 'second pass' to complete the job.
This is the market. It is a sponge. It takes time to complete the mopping up operation, before it is ready to turn. I hope I have made the point! Please be patient and wait. The reversal will come, but not instantly from one signal on one candle. When I first started I became obsessed with trying to understand every aspect of my volume feed. Where did it come from? How was the data collected?
BINARY OPTIONS HOW TO EARNDropping files, selecting not specify the on behalf of a given user rate, much more to decide if right-clicking and selecting. This may allow or general enquiries, are being established, or greater than the longest off-time. Our collection also darker that attacking quickly and accurately, software, including Microsoft. It allows data to be exchanged lot of remote Accessing your work. Note: more complex overwrites these tables.
Volume Up bars also called Testing. Share your opinion, can help everyone to understand the forex strategy. Vums Monday, 05 March Hi thank you for great job I really appreciate. But can you give me the download link for the VSA rectangle S and D trend indicator thosebred and green rectangles. Thank you. Tradeking Thursday, 23 April Hi all , please can anyone who has tried this system share some of its comments here.
Is it profitable or not. Joy Can you please share a swing volume indicator , where we can set the reversal value say by 5, 10, 15 pips etc?. If it can show the swing lines and also the cumilative volume amount and the number of bars in the swing it would really be awesome.
I am sorry i am not a coder , hence the request. If you see weiswave indicator you will understand what i mean Thanks for sharing and really like the passion you have for these , wish you all the success. Sebastian Tuesday, 29 April Admin Friday, 25 April Volume indicator analysis. Submit by Forexstrategiesresources Volume is the major indicator for the professional trader. Gary Dayton is the president of Peak Psychological Services, a consulting firm that specializes in developing peak performance in traders.
Gary is a licensed psychologist and holds a doctorate in psychology. A trading plan is absolutely key to the success of your trading activity. We have provided a trading plan template for you to use to simplify the process and make it quicker to use. We also hosted a mentorship course on Trading plans and Journals which is available to purchase in the mentorship area of our supporting services.
Market Manipulation is caused by the activities of the Smart Money. It is they who cause prices to rise or fall. VSA enables you to trade in harmony with them. Richard Bednall The beginners guide to trading the markets If you are completely new to trading then this 6 chapter eBook will provide a great introduction to the world of trading. This eBook covers these and other question that those who are new to trading ask.
Over chart examples. Truly insightful analysis from a market insider. Videos An interview with Tom Williams Inventor of VSA In this interview, recorded three years before his death in , Tom gives his most detailed insights into the workings of the markets and how the VSA methodology creates a unique perspective for traders.
VSA Foundations Course part1 Learn how to improve your trading strategy by understanding why markets are manipulated and how to identify the footprints on a chart, so you can trade in harmony with the smart money. Get over 3 hours of chart analysis and study.
Enjoy over 3 hours of live trading charts. Top 20 trading Principles part 1 In this video presentation, we explore all of the key analysis required to trade the short side of any market using VSA. Top 20 trading Principles part 2 This video presentation is the second part of our rundown of the key principles used in Volume Spread Analysis. Market Manipulation in Action In this video, we show you how all markets are manipulated and provide real market manipulation examples, across different markets.
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In this course you will fund the answers and the keys to attracting the success you deserve. Gavin Holmes VSA Foundations Course The course lasts for 10 hours split over 4 sessions and available to access online at your own pace. The four areas are as follows: The basics of trading and investing using the chart as your guide. Risk tolerance Create a customized trading plan that is suitable for YOU Properly allocate your capital Set goals for the short and long term Design specific VSA strategies for entry and exit points Manage losses Create, maintain and evaluate your personal Trading Journal.
Smart-Trade in harmony with the Smart Money. Trade using a joined up approach which is simple, logical and intuitive. Attempt to identify trade set ups much easier and quicker. Trade entry and exit decision making process is hugely simplified.
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Vsa forex pdf free demo version on forexFree VSA (Volume Spread Analysis) Course - Professional Traders Secret
Possible tell, aud predictions also
It more like the candlestick analysis taking into consideration the volume.
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|Vsa forex pdf free||It is easy to identify these bars. Electronic trading is here to stay, and the significance of these elements of price action in various markets will change as a result. So, let me use an analogy here to help illustrate this point. Volume on its own simply reveals interest, but that interest is just that, without the associated price action. They all used the the ticker tape, as the source of their inspiration, revealing as it did, the basic laws of supply and demand with price, volume, time and trend at its heart. The advice and strategies contained in this publication vsa forex pdf free not be suitable for your situation. In the examples that follow, there is more than one anomaly, as we are considering the concept of VPA on two levels.|
|Download a forex portfolio||Secrets for profiting in bull and bear markets Sam Weinstein 1. It is the relationship in relative terms which is important. Developed by Charles Dow. So how do we get a clue whether it is retracement or a reversal? The SM has decided to start the game all over again and have decided to stop the down tide and start accumulating. The same could be said of the closing price.|
|Vsa forex pdf free||However, from time to time those charts may be speaking a language you More information. Lorena Harriet Harris 5 years ago Views:. Now at this point you may be asking yourself three questions: 1. The most active stocks will require longer periods of time for their distribution. Fibonacci Retracements What are Fibonacci retracements? This makes possible the next phase Markup.|
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