Volume Spread Analysis(VSA)
VSA is the most power full trading tool because it give the background of the professional. Volume Spread Analysis is a study focused on the analysis of volume and price data to see the distribution of Supply and Demand. Volume Spread Analysis rules combine the major factors that help recognize either an increase in Demand or an increase in Supply which is used to estimate the future price trend.
Volume Spread Analysis could be quite complicated and confusing. Different analysts may have different interpretation of “Smart Money” actions behind the volume-price changes. Therefore, before going into explanation of the chart patterns, signs of weakness and signs of strength, it is necessary to set main ground rules which are lying at the core of the foundation of volume price analysis. When I started using the VSA I was confused because it was hard for me to tell the story behind the candles, any challenge was to differentiate between false signal and True signals.
- Strength & Weakness: Volume Spread Analysis looks for Strength and Weakness – it looks for signs of weakness in an up-trend and it looks for signs of strength in a down-trend. In addition VSA looks at the background – what was in the past.
- Supply Demand: Price is moved by Supply and Demand. Supply is generated by the Bears it is Bearish pressure. Demand is created by the Bulls – it is Bullish pressure.
- Increase in volume to price down-move: When we see increase in volume to the price down-move, it means we have increase in Bullish pressure. New Bulls are trying to satisfy the Supply of the unsatisfied Bears and it lead to an increase in volume.
- Increase in volume to price up-move:When we see increase in volume to the price up-move, it means we have increase in Bearish pressure. New Bears are trying to satisfy the Demand of the unsatisfied Bulls and it lead to an increase in volume.
- Increase in volume after reversal: When after high volume during price up-move we have a reversal down and we see increase in volume, that mean that the Bullish pressure is very strong and high (even stronger) Bearish pressure is required to beat the Bulls. The fight between Bulls and Bears continues. The Bears are stronger than the Bulls at this moment, yet, the Bulls are not ready to yield.When after high volume during price decline we have a reversal up and we see further increase in volume, that mean that the Bearish pressure is strong and stronger Bullish pressure is required to beat the Bears. The fight between Bulls and Bears continues. The Bulls are stronger at this moment, yet, the Bears are not ready to yield.