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If you want to follow the footprints of the big players in the market, relying only on price action is not enough. You need to study the price and volume together to get a view of the whole picture. So basically, VSA is a study of the relationship between price and volume.
This analysis pays attention to three things: Most of the traders in the world either trade based on fundamental analysis or technical analysis. Fundamental analysis involves speculating the market direction based on macro economic factors and financial data of companies.
While technical analysis involves chart reading, quantitative indicators and Dow theory. However, there is a third method of predicting the market trend, through volume spread analysis. VSA involves predicting the moves of professional traders or smart money who are actually responsible for any significant movement in markets.
This is done through studying the volume with respect to price. The term volume spread analysis VSA was first conceived by veteran trader Tom Williams, who also popularized this concept among modern day traders. How to use Volume Spread Analysis? Well, executing and mastering VSA is quite difficult.
The interpretation of VSA varies with different traders. Only the constant market observation and years of practice can help you to trade well with VSA. How it works for different traders is something that needs to be studied well.
But before moving further let us understand the two very basic concepts of VSA: No Demand When the spread and volume of the current bar lowers in comparison to the previous bars in spite of a higher close priceit means that market is showing No Demand.
Actually, the No Demand on Up Bar is an indication that the smart money is not supportive and is not at all interested in higher prices of the stock. Buying and selling are only taking place from the weak money. No Demand bar is formed when all these three conditions are met: If the prices closes higher in comparison to previous bar.
Volume is lower in comparison to the just two previous bars.
If the Range is narrow. If the spread and volume decreases and the market falls, this shows that the stock market is not interested in selling. So in all likelihood, the markets will not continue to fall. The No selling Pressure Bars are formed when all of these three conditions are met Price closes lower in comparison with the previous bar.
Again the volume is lower in comparison to the two previous bars. If you master this, you can very well follow the smart money and be on right side of the trade most of the time.
So by now, you must have got a better idea of volume spread analysis. This is basically a propriety method of analyzing the market which takes cues from the natural rhythms of the market and shows all the disparities in supply and demand. It is like a digital footprint of the professional traders which can be followed by anyone to trade in the market.
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