For one thing, this is just a very very brief introduction to VSA. If I were to write everything I knew on the subject, it would go well beyond the limit of the article and be so long that I'd lose interest in the middle of it because you guys should be reading Master the Markets by Tom Williams to have a complete understanding of VSA. I just want to introduce the concept and idea behind VSA and go over some examples.
Volume Spread Analysis, or VSA, is the study of volume and spread to determine the supply/demand imbalances present in the market. The truth is the markets are rigged in favor of certain group of market makers and syndicates who are always making money. This group is what we refer to as the "strong holders". The ones that are screwed are pretty much the retailers. This group is what we refer to as the "weak holders".
People seem to hold the notion that news is whats driving price action. No, thats not the case at all. Trends are driven primarily by a supply and demand imbalance set by the strong holders. The strong holders trade with a very large amount of money, so they have liquidity issues. So that means the best way for them to load positions is to buy into weakness and sell into strength. This is why trends always end on extreme volume.
Anyways enough with the theory lets now get to practical applications.
We call the ends of uptrends "buying climax" and the ends of downtrends "selling climax". We ALWAYS see the highs on major uptrends on good news and the lows on major downtrends on bad news.
One thing that's important with VSA is checking the "background". Ideally you should be seeing the previous 30 bars on the timeframe that you're trading on. You need to check for signs of weakness and strength(explained later) and look for higher highs/lows to put yourself in tune with the trend. With VSA you should ideally be trading with the trend.
The best entrances within a trend is when we see a no supply(within an uptrend) or a no demand(within a downtrend). Why? The professionals(market makers and syndicates)want to test for professional interest in a given direction. The tests(no supply, no demand) give us an idea of the supply/demand balance and professional interest and that's what we're looking for to determine strength and weakness.
No supply: A bar that goes up, yet closes off its highs and has lower volume than the previous 3 bars.
No demand: A bar that goes down yet closes off its lows and has lower volume than the previous 3 bars.
Below is an example of eurodollar on m15 today(9/19/11). We have two ND's(marked with red arrow and two NS's marked with blue arrow. Note the volumes near the low today.
VSA also works on all timeframes. My favorite intraday is m10 and over long-term weekly setups are absolutely amazing. Let me show you how you could have caught a good entrance in the 2008 GBP crash. Marked are three no demands.
Checkbook for going long:
1. Higher highs/lows
2. No excess supply coming in.
3. No supply
Checkbook for going short:
1. Lower highs/lows
2. No excess demand coming in.
3. No demand
Exits: Excess supply/demand coming against you on lower TF's or ND's/NS's in the other direction.