Volume Spread Analytics
VSA is the study of supply and demand and the manipulation of those forces through examining the relationship between the quantity of volume of a price bar, the spread of a product and the price or range of the bar, and the closing price on the height of that bar.[thrive_headline_focus title=”How to measure volumes” orientation=”left”]
- Analyze actual volumes of shares or contracts
- Analyze the actual number of trades that took place. Less objective since it doesn’t distinguish between 100 share contract and 5000 shares contract
- Tick volume. A number of price changes during a selected period.
- Price and volume
- Cause and effect
- Effort and result
- Mark down
- High-frequency traders (HFT)
- Market makers
- Institutional traders
- Syndicate traders
- The market maker’s objective is to make money
- The major difference between them and other traders is that they have the ability through access to massive volumes, to move prices at their will.
They achieve this through
- Inducing traders to take positions
- Create panic and fear to induce traders to become emotional and think irrationally through
- Quick moves
- Spike candles
- News releases
- Inexplicable price behavior
- Hit the stops and clear the board
Market maker’s constraints
- The IMF restricts their ability to move price to a general range so as to avoid a collapse of the market.
- This is limited to the ADR and will involve moves of as much as 2000 pips per day in most pairs.
- They do not have unlimited equity, so it is necessary for the market makers to close positions and regain balance periodically.
How market makers hit their goals
- Entice traders to take positions by providing evidence that price is or is going to move in a certain direction.
- Appeal to the emotional side of traders by changing the character
and speed of price changes.
- Once the bait has been set, and the bait taken, market makers cause the price to move in a manner to cause price to move against the traders,
allowing the banks to buy currency back from or sell currency back
to the traders so that they are square again.
- This means that the trader has entered the market by buying
currency from the bank at a given price and exited the market byselling back to the financial institution at a lower price. Conversely, the bank has
sold to the trader at the higher given price and bought back fro
the trader at the lower price.
Market maker’s tricks times
- The beginning of the season (quarterly)
- The beginning of the week (Sun/Mon)
- The beginning of the day
- The beginning of the session
- The end of the session
- The end of day
- The end of the week
The end of the season
How dealers and brokers achieve their objectives
- Trigger all stops in a given price range (which is part of the dealers
functions in the MT4 platform)
- Vary the spread (which is why scalping methods often fail) at times when it is an advantage to them to do so.
- Throw a price spike to take stops out, bear in mind that they know where the stops are.
- Target traders who are in margin trouble and move price against
their positions to “finish them off”. Again bear in mind that they
know who is in trouble because it is part of their backend platform.
- This is the first phase of VSA. Smart money begin buying from the public and other small investors at low prices
Characteristics of accumulation
- indecision should be quite visible. In other words, the volumes should be low and quite. No huge volume upsurges.
- the spread of the bars (High – Low) should be narrow.
- volumes should shrink near the support line and expand near the resistance line.
- the stock should be trading in a range for some time
- Shakeouts are rampant meaning smart money move the prices below support to stop out the herd
- There is no more supply to purchase and the smart money are long so the market begins to rise and the prices increase
Characteristics of markup
- There is a series of higher lows and higher highs
- Prices rise on low volumes
- Prices rise in stages with a series of retracements or pullbacks
- On the last phase the price shoots up through the resistance line and it is characterized by a high volume bar
Distribution is the process where the smart money is offloading their accumulated stock at a much higher price.
Characteristics of distribution
- The degree of ascent becomes smaller and smaller the stock trend may even flatten this would mean that the demand is drying up, also the volumes also start to diminish
- When buyers are not willing to pay a high price for the stock sellers also do get reluctant to sell their stocks hoping and waiting for a better price. It is here the smart traders slowly start releasing their stock. Caution is taken not to make it visible. Volume is never too high. Prices are supported at certain levels so that there is no panic
- The finishing line is characterized by up thrust bars and high volatility as the security heads to the final phase
This is the final phase of smart money moves
Characteristics of markdown
- This is when supply comes in plenty, overwhelming the demand. Prices start tumbling. The spreads dramatically widen. There is panic selling from investors.
- The prices drop so rapidly such that most of the investors and bulls who got into late never get a chance to release their holdings.
Basic bar definitions
- Up Bar – A bar can be named an up bar if the close price of the bar is above the closing of the former bar.
- Down bar – A bar can be called a Down bar if the closing price of the bar is below the closing of the previous bar.
- Spread – The Spread is the difference between the Highest and Lowest.
- A wide spread Bar – If the spread of the bar is above 1.8 times the average spread it is classified as a wide spread bar.
- A narrow spread bar – A bar can be named a narrow bar if the spread of the bar is roughly 0.8 the average spread then we will term in a narrow bar.
- Red bar-Climax high , high volume, high range, up bars
- The start of up trends
- The end of up trends, and
- Pullbacks during down trends
- White bar Climax low – signifies exhaustion
- The start of down trends
- The end of down trends, and
- Pullbacks during up trends.
Blue bar neutral– normal trading volumes
Yellow bar- signifies low volumes in the markets
- The end of up trends
- The end of down trends, and
- Pullbacks mid-trend.
Green bar –it’s a high volume churn bar and it signifies a trigger
- The end of up trends
- The end of down trends, and
- Profit taking mid-trend.
- Purple bar-it’s a climax churn bar and signifies a high probability of something happening
- Session between the end of the American session and start of European session
- It is usually the accumulation period
- The essence of this range is what happens after it. Depending on market conditions it can move up to 500pips in either way and then change the trend.
- The movement is characterized by three phases. the first phase of 250 pips the second 200pips and the third phase of 50 pips which is also called the pin
- If a currency moves this much it will certainly have reached the ADR high or ADR low and probably that will be its turning point
- There are two different cycles in trading
- Weekly cycle
- Three day cycle
The three day cycle is characterized by you as the retail trader selling for three consecutive days while the market maker is buying from you, and on the last day the market maker disposes what he has been accumulating.
This leads to losses on any trader who had an open trade on the third day and massive profits for the MM
- Stop hunt involves a deliberate movement outside of the range which is the high or low of the day. The move usually occurs in three phases which can be as simple as three candles. Sometimes you can see a small pause in the form of a pullback in the middle of this.
The stop hunt has two main objectives
- Take out existing stops
Encourage traders to commit to positions in a direction that is opposite to where the real trend is going to be.
Volume trapping wedge
Weekly time frames
Three day cycle
Three-day cycle pattern
- On day one, you (the retail trader) are selling and the institution buys from you.
- On day two, you are selling and again the institution buys from you.
- However, on day three the retail trader is again interested in selling and the institution buys up heavily.
- Now they move price up aggressively triggering stops and taking a profit. (In effect, they are using a scaling-in method to book their profit).
- Following a Level III pullback price becomes choppy and continues because of what happens with the trader’s psychological adaptation to loss. After the market has run down for three days and traders have taken losses, these individuals react by pulling away from the market quite literally and having a few days off before coming back to trade. During this period the market is choppy and relatively stagnant until the traders have returned to play in the game again.
How to analyze patterns
- After a big drop the market must chop
- After three days of drop the market must chop
- After a big rise the market needs more guys
- After three days of rise the market needs more guys
Activities after the HOD/LOD has been hit:
- The spread is opened up by a few pips. This allows traders orders to be triggered outside their normal boundaries and they will be
holding negative positions from the outset.
- It is common to see price undergo a further period of accumulation lasting 30 to 90 minutes which encourages traders to take further positions. When there are enough positions, the price is moved in the direction of the true trend and their stops will be triggered.
- There is often a second move to the HOD/LOD though most of the
time it will fail to take it out (so as to not give those who got in a
profitable position to escape from). This forms the typical W or Mpattern. Note that RRT formation are also common here, but they represent W’s or M’s happening on a faster time scale.