3 – Volume Spread Analysis – Professional Traders Secret

Volume Spread Analysis – What are we learning today? #

Let me state the objectives for today’s presentation…

  1. First and foremost, we learn the problems commonly faced by traders.
  2. Then we’ll move on to how smart money or SM exploits amateur traders.
  3. We will also learn the pitfalls of traditional technical analysis.
  4. We will get introduced to a fantastic solution to all the above problems.
  5. I will also share a cool cheat sheet to accelerate your learning of VSA that is volume spread analysis.
  6. Also, see two detailed examples of VSA in action on Nifty and Bank Nifty

Problem 1: Reading the markets incorrectly… #

The biggest problem, all the traders face is reading markets incorrectly. What exactly do they do when they’re trying to read the markets?

  • They are looking at lagging indicators and this includes all the oscillators MACD the moving averages, etc. All these technical indicators are available in any of the technical analysis platforms. All those are lagging indicators and that always give you signals only after the fact and never before.
  • Then another problem is traders usually believe what they see happening on the charts now. Just because a particular condition sets up a signal is seen on the chart does not mean that is exactly what is happening in the market.
  • Many times smart money use the same techniques or the same signals or same setups that you trade to trap you in the bad trade and then move the market against you. And we call it a failed trade or failed pattern…
  • A very common behaviour that is seen amongst the new traders is chasing breakouts and breakdowns.
  • Another very crucial issue is of not having clearly defined entry points, and I’m not saying defining the points based on price levels but based on logic.
  • There is no clear logic behind the entry points then most of the times traders are trading based on observed patterns in the past. So they spot a triangle and they expect something to happen, they spot a flag or head and shoulders and expect something to happen, and that is precisely what smart money is using against them.
  • Most of the times traders will look at the last bar, the last day, the last price change and try to arrive at a decision. That particular last price change needs to be put in the context of what is happening on the whole chart.
Traditional Technical Analysis Patterns
Traditional Technical Analysis Patterns

Problem 2: Getting trapped by the Smart Money… #

There is a particular pain point that we all have faced, if you are trading for a while now, I’ve been trading for more than 12 years, so I have been trapped by the smart money, ample amount of time to know exactly how it feels and.

Entering markets at exactly wrong time… #

Whenever you are entering the markets at the exactly wrong time and what do I mean by that is… Like if you buy and the market turns around and falls if you try to sell and that is the precise time the market turns around and moves up, then you should be aware that you were being trapped by the smart money.

Exiting markets at exactly wrong time… #

And if you are exiting your position just before the markets turn. Like when you have put on a buy order and the market is moving down and down and then you throw in your position and the market goes up, then you should know that you are being trapped by smart money.

And it happens when you see obvious signs of weakness or strength in the market. The market is moving strongly and you feel that the trend is going to continue forever and you jump on the market and the market immediately goes sideways.

Sometimes it even reverses on the dime. So whenever you feel like you try to enter the market and that is the precise moment when the markets reverse, as if the markets are waiting for you to take on the position, then you should immediately realize that you were trapped by the smart money

Example 1: Failed Breakout. #

Failed Breakout
Failed Breakout

Now, what exactly is happening on the charts. You see prices moving higher, then they move sideways and we get a correction this is a very common occurrence in a trend. Then we try to reverse. And see what happens on the reversal, we reverse, we again come back down and on this day we get a wide-ranging bar.

Now I could not show you all the details. This is a post event scenario. What happens is that we move higher and we breakout above this particular resistance.

What amateur traders are looking at… #

Now, this is the resistance, which, amateur traders are focusing on and they see the prices moving above that, they immediately pile on to longs. They might have even placed a stop loss long order above this reference and expecting that this breakout will continue and we will move much higher from these levels. That actually happens a while later.

You actually see prices breaking out and moving higher, but this is precisely the time when the smart money is waiting for these amateurs to enter a position. As soon as they enter, the SM slam it back down and actually move down for three days in sequence, and anybody who was trying to buy here, they had to throw in the towel at some point in time, as soon as they are out of the market, look what happens market starts moving higher.

VSA Signals show up as different shapes on the charts… #

And that is precisely where this red arrow comes in. That is a VSA signal. By the way, this is a VSA chart I have programmed all the signals on the VSA chart. So that is one of the ways smart money traps you in a failed break out.

Example 2: Stop hunt… #

Stop Hunt
Stop Hunt

Let’s look at another example a stop hunt. Here, you already have a nice sign of weakness. How do you find a sign of weakness? The bar has closed way below the days high very close to that is low.

The volume has increased here, as you can see. And all that suggests that sellers were actually very strong. And what happens after that? Immediately, the next day goes a bit lower but then closes near the high. And on the third day, we actually take out the high of this bar where the sellers were supposed to be very strong. Now, what the amateur traders are feeling that this was a nice signal where sellers exerted much of strength and now we are breaking out above that bar.

It is rarely what it looks like… #

It means that the buyers are in complete control and we should see higher prices. But if you closely observe this breakout bar. What you’ll see is that the range is very narrow. Even the volume is very low. And that is when you get a signal called as no demand. I have a cheat sheet to tell you what exactly these signals mean. Whenever you see no demand it tells us that the buyers are not interested in higher prices.

And look what happened exactly the day you feel that the market is going to break out we start moving lower. That is how smart money traps you.

Example 3: Failed Break Down #

failed breakdown
Failed Breakdown

Let’s look at another example this time of failed break down. Here what you see is that we actually moved higher, we topped out and now we are moving down with some confidence. And you see this important high volume node on the volume profile. I use these as support and resistance. I have marked this green line as support and I even have marked this consolidation area in this blue rectangle and see what is happening.

We have broken down below that particular reference strongly the volume is increasing. All the signs are there to suggest that the trend is going to continue down. And as soon as you start selling what happens, market starts to move sideways.

Can you find out whether this is the right time to enter… #

Now, why did this happen? Is there a way you can find out that this kind of thing is going to happen and this is not the right time to enter? Well, definitely there is. That is what we are we are going to look at it right now.

What exactly is VSA? #

VSA consist of three important factors…

  1. The first is the range or the spread of the bar. That is nothing but a difference between the high of the bar and the low of the bar, that’s all.
  2. Second is the associated volume. So we will see volume indicator is displayed at the bottom of the chart in traditional technical software. We do not analyze volume all by itself, but we look at what was happening in the last few bars. There are precise formulas for that. And the cheat sheet includes that.
  3. The last thing is we look at the close. Now the close we analyze with respect to two factors.
    • We analyzed the close with respect to yesterday’s close.
    • And with respect to today’s high low and mid. So if we are like close to the low for this bar, then this is a weak close. We are below the midpoint of the bar and the sellers are more in control. And if we closed near the high of the bar then it is a strong close. That’s all nothing more nothing less.

How the Smart Money concept relates to VSA? #

I would like to say that smart traders are traders which have more staying power, more capital, more know how, more know what, more everything. They better in every term than an amateur trader. They are called the smart traders and they do not use VSA or they do not use any other tool like we use. For example market profiler or order flow. But their trading action gives us signals which we read using VSA.

So smart money and smart trader’s trading will generate a certain activity in the market. That activity you can read using VSA charts, so that is how the smart money or smart traders are related to VSA.

Why every trader should thank Tom Williams… #

These guys come first. And based on the actions of smart money, Tom Williams designed this fantastic way of analyzing the markets. He is no more now, but he has given us the greatest gift a technical analyst can receive, formulated these VSA signals and principles. So that is what VSA actually is.

The VSA Cheat Sheet #

And now we come to the VSA cheat sheet. This is a special document I prepared for you. It includes 16 most popular and effective VSA patterns or signals or setups.

And it includes three things for each signal…

  1. Favourable future, what exactly should happen once you spot a signal.
  2. Unfavourable future. It tells us what exactly should not happen if you have spotted a signal.
  3. The background conditions or BG which is required for that signal to work.

So I am not just giving you a black box system where you see certain things happening and then you have to just immediately go and buy and sell. I’m giving you the background under which it will work and giving you the favourable future as to how you will confirm that this particular signal is working. And I’m also giving you unfavourable future as to the things. If they happen, then you will know that the signal is not a valid one and that you should not follow that.

What it will do is basically it will accelerate your learning of the volume spread analysis, that is exactly what I want.

VSA in action – 1 Aug 2017 real market example… #

Note: this is a commentary made on real time charts, please refer the video at the beginning of this post for better understandiong…

Nifty Example #

All right, let’s move on. So now you can see VSA in action I’m taking the 1 Aug 2017 short term top on Nifty and Bank Nifty will be analyzing it on daily charts first and then we’ll drill down on the 15-minute charts.

At this particular time, I want to move to the technical analysis software that is and I would like to show you directly on the charts.

We are on the daily chart for Nifty and we are going to analyze this particular area. So let’s start. OK, so what is happening, first and foremost, we are having a strong trend, then we see consolidation. Then we break out and then what we see is a sign of weakness. We see a strong trend, we see consolidation and we see prices breaking out again and then we hit this particular sign of weakness. It does not tell us that market is going to reverse, but it definitely warns us that the sellers are coming in and this is a sign of weakness and this is a warning sign basically, you should pay attention to and watch the market closely.

And if you take a broad look, you’ll see that the markets actually went sideways after this particular sign of weakness. Then what happens then we try to move higher? This is the example of Stop hunt, which we saw here, the smart money moved higher above this sign of weakness and what was the purpose? The purpose was to see if there is any buying interest left in the market or not.

And then you see that the smart money pushes the prices up but not with heavy volume. But they do not have to do much because the trend is already there. And when we break out above this particular high they observe if there is a new buying coming in and when they see that there is no new buying coming in, what they do, they now feel confident that the market should come down. So we see that strong markdown on these two bars.

Then the market again moves higher. Why is this happening? This particular up day serves the same purpose that these three days serve, and that is nothing but to test the commitment of buyers once more. So we have a sign of weakness, we actually have three in a row that actually does not mean anything, but we have three in a row. Then we try to move higher and we create more demand. If you click on the bar, you get the signal on the left.

So this was an upthrust, this was supply overcoming demand and then on this particular bar, what you see is a no demand. So we break out on new demand. Buyers are not very keen on moving the prices higher and you see markdown on the next two bars. Again, we try to move higher. And see what happens on the next day, if you see an up bar it should be confirmed with another one. But what we have actually is a down bar, and that tells us that the buyers on this particular bar are not very strong.

And what is the signal? This is no supply. And why is it no supply? Sometimes it means that the sellerls are not coming into the market. But in this case, it means that there is no demand coming in and prices are moving lower. And whenever you see prices accepting below the low of no supply bar it means that you have fresh supply in the market. And that is exactly what we got. So a sign of weakness, a couple of them, and then you see no demand trying to break out above it.

This is what we call a sequential setup in volume spread analysis. A series of events tell you that what the sellers or buyers are trying to do, what happens is you breakout with no demand and we come down. We again try to move higher with the test then the next bar is a no supply bar. And look at how this bar does not even go above the high of the previous one. That is a sure sign of weakness.

And then on the next day, we see prices moving lower sharply and continuing for four days. So if we’re observing the market using the VSA principles, you would have definitely shorted here and you would never have shorted on this bar.

Even though this is a sign of weakness, there is no confirmation, a confirmation comes after this, no demand bar when we close down. And then again when we test this. So all these indications tell us that we have some weakness in the markets and we should follow through the downside and we do get that. And that is how you get the logic behind the actions of the smart money. And you can use it to trade.

Now let’s look at the same chart on a 15-minute time frame, here it is. OK, so what is happening, this is the top we saw. This is the downside follow through on the two days one and two. Then we get a strong up day. And where does this up day stop? That is an important thing. First and foremost I will draw this particular range. A couple of days moving sideways, that tells us that the smart money is actually not from the buy-side of otherwise we would have extended the range to the upside.

So we have smart money selling on these two days, distributing their holdings. And then when we come back up, see where we stop, you will find that the most traded area or the high volume node comes at this particular level. And see precisely how the market stops at this particular high volume node, because this is where there was maximum amount of agreement among the traders.

And when the prices come back that those who were shorting here, SM came back and defended their price here .

On the first day, we just come and we stop here on the second day, we basically move sideways and never could challenge to trade above this particular reference. All this tells you that there is some weakness developing. The weakness which developed on 1st and 2nd of August is very true, and it is formed by smart money because now we cannot take them out. And then look at the daily chart. You saw that this was a no supply. And as soon as we break the low of no supply, you get a signal on VSA and you can short the market.

Now, the same VSA principles can be seen on the 15 minute you can you can also use them by looking at the context on the larger time frame and then dropping down to lower time frames and using the signals to take fresh trades.

Bank Nifty Example #

Let us look at the same development, but on a different instrument that is Bank Nifty. Here it is. Here we have a different kind of development.

What happens is that we are moving higher. We are getting some signs of weaknesses along the way, but there is no follow-through to the downside. Again, we get no demand. So no demand in the fresh high territory is always a sign that the buyers are tired and they might need some pullback. And surely we get that. If you are a candlestick user, you will look at this bar as a bearish engulfing bar because it engulfs the range of prior bar, and then what happens is we move down for two days and then we get this pullback, something similar to what happened on the Nifty.

We move higher and look at this particular bar. And just observe the same, no demand again. No demand here, sellers coming back into the picture on a pullback. What we get is another no demand, the close is off the highs. So this tells us that the buyers are not basically very keen on moving the price higher. They actually are getting exhausted, and this was basically a test of what was happening a few days earlier.

And the test successfully told us that the buyers are not interested and look at the follow through. Now, if we drill down on the 15 minute chart, will see something similar that we saw on Nifty. So again, we have this particular Range. Sideways range, where you see that uptrend is stalling and it is stalling because the smart money is coming in from the other side. Now if you draw this particular range you will see that the prices basically moved sideways in this range.

And the reason was you have to see what happened in the past, earlier, the market was moving higher so the trend was up. Now it is moving sideways.

What it tells us that we are hitting a distribution phase. Then we have confirmation by moving down. Then again, we move higher with a strong up day, you saw that on daily charts. And this particular day is the no demand day, which we saw in the daily chart. So what happens, we move higher, but we are not even able to tag this particular sideways trading zone. And that tells us that the buyers are not at all strong. And then the next day, as soon as we take out the low of this no demand bar, we see a continuation to the downside.

So that is how these principles are seen on the charts. You can see it on all time frames, so it’s not just limited to daily or intraday.

How can you use Volume Spread Analysis (VSA)? #

OK, so now we come back to how you can use the VSA or volume spread analysis. And I’ll tell you how you can do that.

  1. First and foremost, you can refer to the VSA cheat sheet that is available for you to download. You can see what the signals mean, what the favourable and unfavourable futures or background you require. That will give you some hold on these signals.
  2. Then you can use the BellTPO VSA Indicator observe the signals in realtime.
  3. You can also read the Tom Williams book, which is available as a free download and the information section below the video.

Signup below to get the Cheat Sheet #