Trading by Volume and VSA Analysis: The Foundation of Successful Trading

Modern financial markets offer a wide range of tools and strategies that have significantly simplified trading. However, the variety of methods complicates the process of choosing the right trading system. Finding a simple yet profitable strategy on the first try is not an easy task. In this material, we delve into one of the most fundamental methods of market analysis — VSA (Volume Spread Analysis). We will explore its history, main principles, and key theorists.

What is VSA Analysis?

Volume Spread Analysis is a market analysis method based on evaluating volumes and price changes. Essentially, VSA helps traders identify the actions of major market participants, who often dictate price movements. Unlike most technical indicators that focus on historical data, VSA analyzes current activity to predict future market movements.

Large market players have access to resources and information unavailable to most traders. Their actions create trends, and understanding these actions provides traders with a significant advantage.

Example of Using VSA

If you can recognize when a major player is accumulating or distributing assets, you will trade in harmony with the market. This not only helps avoid mistakes but also enables you to open positions with the highest probability of success.

Tools Needed for VSA

To use VSA, you need two essential components:

1. Price chart (candlesticks or bars) that shows price dynamics: open, close, high, and low for a specific period.
2. Volume histogram, which displays market participant activity.

With these tools, you can identify key moments on the chart, such as accumulation, distribution, and trend reversals.

The History of VSA Development

Richard Wyckoff: The Founding Father

VSA analysis has deep historical roots dating back to the 19th century. One of its founders was Richard Wyckoff, who first emphasized the importance of volumes in market analysis.

• 1908: Wyckoff published his initial methods of market analysis.
• 1911: He began publishing weekly forecasts for traders.

Wyckoff believed the market was a process driven by the actions of major players. His method was based on the concept of a cycle:

1. Accumulation — Large market participants buy assets at favorable prices.
2. Markup — Prices rise due to increased demand.
3. Distribution — Assets are sold to less experienced traders at higher prices.
4. Markdown — The cycle repeats.

Tom Williams: Advancing VSA

Later, Wyckoff's theory was developed by Tom Williams, who classified market situations and proposed a detailed analysis system. Williams identified signs of strength and weakness and introduced the concept of spreads, which measure the difference between the high and low of a price bar.

Key Principles of VSA

Volume

Volume indicates market participant activity. It can be categorized as:

• Very low
• Low
• Average
• High
• Very high

For example, a volume twice as low as the average is considered very low, while a volume twice as high is extremely high. Studying volumes helps identify moments when major players enter or exit the market.

Spreads

The spread is the difference between the high and low of a bar. The width of the spread indicates the current market activity:

• A narrow spread suggests low volatility.
• A medium spread indicates stable movement.
• A wide spread signifies high volatility.

Price Dynamics

The interaction of volumes and spreads shows how price reacts to supply and demand. For instance, high volume with a narrow spread may indicate position accumulation.

Practical Application of VSA

VSA is used across all financial markets: Forex, stock markets, and cryptocurrencies. However, the specifics of analysis may vary.

On Forex

On Forex, only tick volumes are available, showing the number of price changes per period. Despite this, VSA remains an effective tool for identifying accumulation and distribution zones.

On the Stock Market

Stock exchanges, such as NYSE, provide data on actual volumes. This makes VSA especially powerful for analyzing stocks and ETFs.

In Cryptocurrency Markets

Cryptocurrency exchanges, such as Binance, allow analysis of real volumes and the order book to assess supply and demand.

Conclusion

 

VSA analysis is a unique method that enables traders to work in harmony with major market participants. Learning its fundamentals and history helps better understand market processes and make more informed decisions. If you want to improve your trading skills, VSA will become an indispensable tool for you.