In the first article, I’ve explained various concepts which are critical to understand Volume Spread Analysis. In this article, I’ll continue to explain more insight on VSA as well as simple set-up we can apply to real trading.
We’ve seen every trader has their own way to look at chart, some using candlestick to identify pattern; some using line chart to identify swing high, swing low; some even not looking at chart at all, they argue that fundamental sentiment drive the market, so they follow their fundamental interpretation to make trade decision. For me, I use phases on to define background and trading direction.
In every market, we have two forces which interact and move the price: Supply and Demand. When supply is overwhelming demand, the big player will start distribution phase, after a period of distribution, the sell-off starts and now we have downtrend or mark-down phase. After a period of sell-off, player will start to lock in profit as well as weak demand step in; price will retrace to 38.2% or 50% Fibonacci levels before it hits supply again and continue its downtrend. We call it re-distribution.
After a period of mark-down, big players start profit-taking as well as big demand steps in to buy the market at cheap price. Everything reserves, now we have mark-up phase starting with accumulation, re-accumulation phase until market hits substantial supply again.
I use futures-volume chart to identify the direction for major pair. I will give a few example on phase identification, I use weekly time-frame here but we could use any timeframe to look at phases, from weekly to 5 minutes timeframe because it’s market behavior, it’s true on all time-frame. Here's Euro and Aud futures chart used to anticipate euro/usd and aud/usd
After phase identification, we’ll trade with the phase, I call it “trade in harmony with the market”, when we see the accumulation and mark-up phase, only one trade decision could be made is long the market, short trade on this market condition is very risky and it’s considered counter-trend trade.
We are then moving to lower time-frame to look for set-up. First we look for stopping volume at significant support/resistance level, important fibonacci number, significant trend-line to anticipate the potential up-coming reversal move. The chart below is the level I mark to wait for potential reversal.
When price approaching the levels, we’ll see if there’re any stopping volume formed and whether price starts ranging to start accumulating/distributing. After that, I’ll wait for a pushing through and then a no supply/demand test is a must. If you’ve read “Reminiscences of a Stock Operator”, Jesse Livermore once being asked about his opinion of the current market. He said “It’s a bull market, but I haven’t bought any shares”, his friend asks why. Jesse Livermore said he would wait for price to raise more before he buys, his friend doesn’t understand and ask “why don’t you buy at cheap price but waiting for more expensive price”. His friend and average traders could never understand, because the "Great Bear of Wall Street" always waited for confirmation, for liquidity to finally step-in to make the move. That’s why the pushing through and the test are very important factors, which has been anticipated very long time ago and now, it still has its critical roles in trading decision.
Trade is triggered once price moves past the test, SL is above significant swing high/low. Take Profit is taken when we see a potential opposite set-up.
That’s it for now, I hope you enjoy it. Any comment would be much appreciated.