Volume spread analysis is one of the most important concepts of technical analysis. This is because volume plays a very significant role for traders. It is one of the key movers of the market because the market is mostly moved by fear and greed among the participants. Volume is also important in confirming a trend and chart patterns.
What is Volume Spread Analysis?
Volume spread analysis is a trading methodology that focuses on analyzing trading volume and price action to identify market trends and predict future price movements. The approach was first introduced by Richard Wyckoff, a stock trader who developed a method of trading based on market psychology and technical analysis in the early 1900s.
The theory behind VSA is that changes in trading volume can reveal important information about market behavior. If the price is going up and volume is increasing, it is a sign of buying pressure and a bullish trend. Conversely, if the price is going down and volume is increasing, it is a sign of selling pressure and a bearish trend.
How Does Volume Spread Analysis Work?
To use VSA, traders analyze price bars and volume to identify trends and reversals. The approach involves looking for specific patterns and signals, including:
1. Upthrust Bars
An upthrust bar is a signal that the market is likely to reverse. It occurs when the price moves up on high volume but then closes near the low of the bar, indicating that sellers are stepping in.
2. No Demand Bars
A no-demand bar is a signal that the market is likely to continue in a bullish trend. It occurs when the price moves up on low volume, indicating that there is no significant buying pressure.
3. Buying Climax
A buying climax is a signal that the market is likely to reverse. It occurs when the price moves up on high volume but then closes near the low of the bar, indicating that sellers are stepping in.
4. Effort vs. Result
Effort vs. result is a concept that compares the volume of a price bar to the price movement. If the volume is high and the price doesn’t move much, it is a sign of weakness. If the volume is low and the price moves significantly, it is a sign of strength. By analyzing these signals and patterns, traders can identify market trends and reversals, and make informed trading decisions.
Benefits of Volume Spread Analysis
Volume spread analysis has a number of benefits for traders. Here are a few:
1. Helps Identify Trends and Reversals
By analyzing trading volume and price action, VSA can help traders identify market trends and reversals. This information is crucial for making informed trading decisions and maximizing profits.
2. Provides Insight into Market Behavior
VSA can also provide insight into market behavior by revealing buying and selling pressure. This information can help traders understand market dynamics and make more accurate predictions about future price movements.
3. Can Be Used in Any Market
One of the great things about VSA is that it can be used in any market, including stocks, forex, and commodities. This makes it a versatile tool for traders of all kinds.
4. Easy to Learn and Use
Although VSA can be a complex approach to trading, it is relatively easy to learn and use. With some practice and dedication, traders can become proficient in using VSA to identify market trends and make profitable trades.
Getting Started with Volume Spread Analysis
If you’re interested in using volume spread analysis in your trading, here are a few steps to get started:
1. Learn the Basics
Before you start using VSA, it’s important to understand the basic concepts and signals. There are plenty of resources available online, including books, articles, and videos, that can help you get started.
2. Find a Trading Platform with VSA Tools
Many trading platforms now offer VSA tools that can help you analyze trading volume and price action. Look for a platform that offers these tools and try them out to see how they work.
3. Practice, Practice, Practice
As with any trading strategy, practice is key to success with VSA. Start by paper trading or using a demo account to practice using VSA in real market conditions. As you gain experience, you can start using VSA in your live trading.
VSA vs Wykoff method
Volume spread analysis goes hand in hand with the infamous Wykoff method which establishes the consensus that changes in a market are a result of an effort that is represented by the trading volume. If the price action is in harmony with the trading volume the price would continue in the same direction If the price is not in harmony with the trading volume which means one is increasing and the other is decreasing, it is likely that the price would reverse.
Tom Williams and VSA
Tom Williams wrote one main book, “Master the Markets,” which was published in 2005. This book provides a detailed explanation of his Volume Spread Analysis (VSA) methodology for analyzing the financial markets. In addition to this book, Williams also wrote a few articles on VSA and trading, which have been published in various trading magazines and websites.
Tom Williams’s trading principles
- The market is driven by supply and demand. Always has been, always will be.”
- “Volume always reveals the truth of a situation.”
- “Never forget, the market is the sum total of human emotions.”
- “Profits come from understanding what the crowd is doing, then doing the opposite.”
- “Trading is all about understanding what the crowd is doing, and then staying out of their
way.” - “In trading, always think in terms of risk versus reward.”
- “Never let your emotions control your trading decisions.”
- “The markets are the great equalizer. They do not discriminate, they do not show
favoritism. They are a reflection of the world we live in.” - “The secret to success in trading is to think for yourself and not follow the crowd.”
- “Patience is the key to success in trading. Wait for the right opportunities, then strike with
confidence.”
Conclusion
Volume spread analysis is a powerful tool for traders looking to identify market trends and make profitable trades. By analyzing trading volume and price action, VSA can provide valuable insights into market behavior and help traders make informed trading decisions. If you’re interested in using VSA in your trading, be sure to do your research, find a trading platform with VSA tools, and practice, practice, practice.
