VSA (Volume Spread Analysis) is a trading strategy that focuses on analyzing the relationship between price movement, volume, and spread. In the case of VSA, the word spread means the difference between the high and low prices in financial markets. Developed by Richard Wyckoff in the early 20th century and further popularized by Tom Williams, VSA aims to identify the activities of professional traders and understand market sentiment.
Here are the key components and principles of VSA trading strategy:
VSA emphasizes the analysis of trading volume, as it is believed to provide valuable insights into market dynamics. By observing changes in volume, traders attempt to gauge the strength of price moves and the involvement of different market participants. In forex, unfortunately, there are no real market volumes but only tick volumes, which makes it difficult to analyze. But today, there are indicators that read the volume on futures instruments and translate them into the meta trader platform. This method can also be used because currency pricing is derived from the pricing of currency futures.
VSA also takes into account the spread, which represents the range between the high and low prices of a given period. Wide spreads are considered significant, indicating increased buying or selling pressure. Narrow spreads, on the other hand, may suggest decreased activity or indecisiveness in the market.
Effort versus result
VSA focuses on the volume and price movement relationship. If volume increases significantly during price advances, it suggests strong buying interest. Conversely, if volume rises during price declines, it may indicate strong selling pressure. As a result, traders look for situations where effort (volume) does not match the expected outcome (price movement), which can signal possible reversals or continuations.
Upthrusts and springs
These are specific patterns identified in VSA. An upthrust occurs when prices briefly move above a resistance level but fail to sustain the upward momentum and close lower. A spring, on the other hand, happens when prices briefly move below a support level but quickly reverse and close higher. These patterns can indicate potential reversal opportunities.
No-demand and no-supply bars
These are candlestick patterns often observed in VSA. A no-demand bar appears when prices close near the high with low volume, suggesting a lack of buying interest. A no-supply bar occurs when prices close near the low with low volume, indicating a lack of selling pressure. These patterns can indicate potential turning points in the market.
VSA is often used in conjunction with other technical analysis tools and indicators to confirm trading signals. Traders may combine VSA analysis with trend lines, moving averages, or other indicators to increase the probability of successful trades.
It's important to note that VSA is a complex trading strategy that requires practice, experience, and a deep understanding of market dynamics. Traders who use VSA aim to gain insights into the intentions of market participants and make informed trading decisions based on those insights.