Volume spread analysis

The foundations of this system were laid by Richard Wyckoff, the legendary trader, who supposedly made a fortune with this system. In the 1970s, this system was taken by Tom Williams, who developed it into its current form, popularized it and gave it the name Volume Spread Analysis. According to the author, this system applies to all time frames and all markets, where we have high-quality data sources.

Before discussing individual entry patterns, let us first consider whether we can use this system on a decentralized currency market, where the trading volume is inaccurate. Below is a comparison between the futures exchange platform, which displays accurate data directly from the exchange, and the MetaTrader 4 platform with inaccurate data.

https://preview.redd.it/5dbiro67kcxd1.png?width=745&format=png&auto=webp&s=b3d81991dfcba227697edd404e66123b660c3ea5

The figure shows that the volume is proportionally the same. It is safe to assume that this system can also be applied to the currency markets.

The basic premise of the system is:

The VSA seeks the cause of price changes in the imbalance between supply and demand caused by smart money.

The VSA has these variables:

Spread of a candle

• Volume – shows the activity.
• Spread – shows the size of the market movement.
• Closing price.
• Weak Money – Fearful Unprofessional Traders.
• Smart Money – Professional traders and institutions.

VSA assumes that the market is constantly in one of these four phases:

• Accumulation
• Increase
• Distribution
• Reduction

Of course, it depends on the time frame the trader is trading on. In case a trader is trading intraday, the market may be in a different phase than the current long-term market.

https://preview.redd.it/q4usrmwjkcxd1.png?width=559&format=png&auto=webp&s=6b57a45d871562f411e80d9594f20a0c754fc9cd

Accumulation

This is the process in which smart money buys a large amount of assets at a price it considers advantageous. Accumulation occurs in congestion zones and the total trading volume is low, because accumulation takes some time. The congestion zone is a sideways zone with no trend. Other signs of the accumulation phase:

• The total volume should be very low. In case of higher volume, the day spread (or another time frame, such as the spread for a five-minute candle) should remain low.
• Candle spreads should be tight.
• Trading volumes should be higher at the top of the congestion zone and lower at the bottom of the congestion zone.
• The buildup has been going on for a long time from a time frame perspective.

It is important to remember that the market context is always higher and the above conditions are likely never to be met. The entire accumulation process culminates in the next phase, called Mark up.

Mark up

Once the Smart Money has accumulated enough assets, the Mark up phase comes, when the top of the accumulation zone is broken. Mark up is characterized by the fact that the candles form higher lows and close near the top. The trading volume is not high because no one is resisting the buyers.

Short corrections have low volume. If the trading volume was high, it would also mean that sellers are entering the market, which would not be good for buyers. Short corrections serve to close profits. The low of each short correction must be higher than the low of the previous correction. The end of the Mark up phase could be indicated by smaller bullish candles with very low volume. The Mark up usually ends with a Buying Climax – huge bullish candle, which is caused by weak money entering the market.

Distribution

After the Buying Climax, Smart Money starts selling their positions without lowering the price because Weak Money is entering the market. A good example of a distribution is not easy to find, concentrated areas where smart money sells positions to weak money are rarely found.

Mark down

Once the smart money has dumped its positions, it is time for the Mark Down. Mark Down is the most dramatic phase of the panic-filled market. For Mark Down, wide short candles are typical. The end of the Mark Down phase can be noticed through price patterns such as Stopping Volume or Absorption Volume.

More:

1. BONKbot Telegram User Guide: Sniping 1000x Memecoins
2. Top 3 Stocks & Crypto Investment Newsletters
3. Subscribe to our new Finance and Investment Podcast on Youtube