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Tuesday, May 15, 2007

Volume Spread Analysis

1) Volume + WRB

2) find WRB with Ultra High Volume

3) consider demand / supply dominate the price in uptren or downtrend

4) find low volume bars (no demand / supply and some test bars / maybe both)
* No Demand : A bar/candle with volume less than the previous two bars/candles closing up (or equal) from the previous bar/candle for No Demand.
* No Supply : And closing down or equal for No Supply.

sometimes there will be high volume tests or Up Thrust on high volume
1 ) high volume test: close on or near its high - make a lower low
2) Up Thrust: cloes on or near its low - make a high her

5) test bar (for demand / supply)
1) Test bar - A LOW VOLUME SIGNAL WITHIN THE RANGE OF A PREVIOUSLY HIGH VOLUME BAR.
2) Usually doji, hammer with long shadow


http://www.trade2win.com/boards/archive/index.php/t-17478.html
http://www.traderslaboratory.com/forums/34/vsa-volume-spread-analysis-1369-15.html


A test should follow a sign of strength and if successful (immediate rising market), is a good indication of an upmove.
A failed test (no immediate rise, The Dog That Didn't Bark as I think DBPhoenix puts it) is a sign of weakness.An upthrust is a test in reverse (sign of weakness, followed by an up bar closing on its lows).As I said earlier, tests following a strong sign of strength (wide spread down bars on high vol) are a favorite of Tom's, and form the 'W' or double bottom.I can't see that tests are tradeble without taking into account the context, etc. Some of the bars marked on the chart are 'No Supply' or 'No Demand' bars rather than tests, in my opinion. A test has to test something (whether there's any floating supply left), and that's normally down into an area of previous high supply(high volume, activity), trying to get the weak holders worried and catch stops. If they isn't any supply coming onto the market at these lower prices, this 'proves' that the floating supply has been removed, allowing prices to be marked up without any fear of meeting resistance from the weak holders dumping their supply onto the market at the higher prices. This is Tom's theory of course.
No supply is a down bar, narrow spread, with vol less than the previous 2 barsNo demand is an up bar, narrow spread, with vol less than previous 2 barsNo supply and No demand bars are great confirmation signals,


Right, back to the business of mastering volume spread analysis. I have been thinking about how to organise this thread and I have the following ideas:1. We will not discuss Tradeguider indicators and will not use charts from Tradeguider. We will keep the discussion limited to VSA only. Tradeguider is meant to be a learning tool. In order to trade with VSA, all we need is high, low, close and volume. That is all we will use.2. We will define and describe the major patterns and discuss what they represent and why. We will then discuss how this pattern can be used in practical purposes, in actual trading.

First some basic definitions:
Up bar = a bar that closes above the close of the prior bar
Down bar = a bar that closes below the close of the prior bar
Let's now define our first pattern: yes you guessed it, it's the test.
Test----Definition: A test is a sign of strength and occurs either during a down move, or during a retracement within an up-move. A test is defined by the following characteristics:- low volume- close near the high
Detailed description and rationale: A test is performed by large players who are bullish on the market, but are not sure about the amount of supply still present. The only way to find out is to mark the price down with a little selling. If the bears still have a lot of supply to offload, they are likely to sell into this weakness, resulting in a high volume and the bar closing near the low possibly with wide spread. If however the supply has been removed, there will be little selling from the bears and the volume will be light. Price will close near the top because there is no selling other than the little amount engineered by the bullish professional.
Reliability: TW describes test as the most important low volume buy signal. Reliability is increased if the test bar goes into new lows (i.e., the bears are not interested even when the price has reached a several-month low, meaning there is really no supply left). There is however a note of caution. A test is not a buy signal. It must be confirmed by immediate sign of strength (e.g., wide spread up bars on good volumes, bars closing near the highs etc).
Practical use: This is something I haven't worked out yet and this will take time and observation. I am not an expert in this. The purpose of this thread, as I said is to create a trading plan based on VSA. A possible practical use of tests could be to watch the next 3 bars. If no sign of strength appears, we ignore the signal and wait for the next one.

This is absorption volume (volume is ultra high). Note that this bar trades through the resistance tops. THIS IS PUSHING THRU SUPPLY. PROFESSIONAL MONEY WANTS TO KEEP THE LONGS FROM SELLING (SUPPLY). SO THEY RAPIDLY MARK PRICES UP. IN THIS BAR, THE MOVE IS TO LOCK TRADERS IN, NOT KEEP TRADERS OUT.

3 comments:

  1. If you observe high volume accompanying wide spreads up, this shows that the professional money was
    prepared to absorb any selling from those locked-in traders who decided to sell – this is known as
    absorption volume. In this situation, the market-makers anticipate higher prices and are bullish. They
    know that a breakout above an old trading area will create a new wave of buying. In addition, those traders
    who have shorted the market will now be forced to cover their poor positions by buying as well.
    Furthermore, traders that are looking for breakouts will buy. Finally, all those traders not in the market
    may feel they are missing out and will be encouraged to start buying. This all adds to the professional
    bullish positions. If you see any testing or down-bars on low volume after this event, it is a very strong buy
    signal.

    ReplyDelete
  2. Absorption volume typically marks the end of a downward trend. It is characterised by a very high volume
    bar that closes below the previous bar, on a wide spread. In normal circumstances, this would be construed as selling, but the defining difference is that the bar closes on the high. If the high volume had represented
    selling, how can the price action close on the high? There was a huge amount of buying (absorption) on this bar. In this instance, the volume was extremely high and there was still a large amount of floating supply, which accounts for the market drifting sideways before testing the high volume area for further supply – the test shown by the rectangular signal after the absorption volume. The test serves a number of
    purposes – it’s designed to check for floating supply, mislead the market, and catch stops on the long side (i.e. to relieve traders of stock who are correctly buying into the move). At the point of the test, most of the supply had been removed and the market was almost free to move upwards – it just required one last dip
    down to remove the remaining latent supply.

    ReplyDelete