Volume Spread Analysis
It’s a proven set of techniques of analyzing financial markets. First developed by Richard D. Wyckoff, one of the most successful Wall Street traders of all time, in the 1900s, and perfected by Tom Williams, during the time he was a syndicate trader for 15 years based in London in the 1960s-1970s. Other very successful Wall Street traders like William O’Neill use it as well. It’s based on supply and demand, which governs any market, and not anything else: no technical indicators, no price patterns, just pure price and volume action.
Any business where there is money to be made has professionals: Art has professional traders, poker has professional players, betting has professional betters, and financial markets have professional traders. Being successful in the markets is all about following the footsteps of the ‘sharks’ of this game: market operators, pit traders, market-makers, syndicate traders and top professional traders. The purpose of VSA analysis is to show you what the professionals, also named ‘smart money’, are doing, and profit with that knowledge!
Richard D. Wyckoff, professional
stock operator in the 1900s
Tom Williams, London syndicate
trader in the 1960s-1970s
In the gold top in September/2011, there was major supply – the strong holders (professionals) dumped their gold futures stock on the weak holders (the public), and it is visible by high volume and sluggish price increase, typical of a distribution.
In the 2008 top of the American stock market, there was also distribution and lack of demand at higher prices right before the bear market started.
How do professional traders really trade?
Consider yourself in the seat of a professional trader, with a large capital pool: you are long on a given stock, in a very large position (the same logic applies to currencies and commodities, stocks are used in the example to simplify). Now, because the analysis you did tells you should close positions, how will you do it? If you sell all the shares you have in a single order, that will cause panic in the market and the prices will depress, rapidly going against you. A smarter way of doing it is to sell, say, 5% of all the shares you own at a given period of time, and repeat it until you sold everything. That way you won’t cause a panic in the market, and you have more chances of selling the shares at a more interesting price! This is called distribution, also named institutional selling, whereas the reverse (timely buying) is called accumulation. And when is the best time to do this? Well, since you want to sell the most amounts of shares in the least amount of time, without putting the price against you, the best time to do it is when the public is buying, since they will absorb all the supply. Note that in forex accumulation and distribution happen at a much faster pace, since these are very liquid markets. Nonetheless, VSA applies just as well and you can see when exactly when it happens.
One really fast way to check this: open up any random chart with volume, zoom out, and check the volumes (real or tick volume for forex, both work) on the bottoms and tops. You’ll notice the volumes are unusually high at these turns: and there you have your accumulation and distribution.
So how do we detect what the smart money is doing, and how can we profit from it?
Well one thing about professional traders, is that they usually have a lot of money to invest, otherwise they wouldn’t be making a living out of the markets. Sure there are not-so-rich starting professional traders, but the mature ones are and those are the ones you want to be keeping the track of anyway – so following volume is essential to see their activity! High volume (high institutional activity) and low volume (low institutional activity) are very important signals which can tell you what the big boys are doing. You can also detect their activity in the spread (High – Low) and closing of the bars. You won’t need to do any classical technical analysis or fundamental analysis, since that has already been done: you just have to follow their footsteps!
Do you need to go through the lengthy process of learning every VSA bar and training?
VSA is the best technique I’ve seen to analyze the markets by far, because it goes right to the fundamental causes of market movements. But anyone who is proficient with VSA will tell you it takes months to learn, which includes a lot of practice and real trading experience: I’ve gone through it myself. Well AnalyticalTrader is designed specifically to avoid that: you get an automatic VSA analysis as good as a great VSA trader would make, and much faster and more visually appealing!