VSA 101

Why Smart Volume Spread Analysis Works

Every market moves on supply and demand: Supply from professional operators and demand from professional operators. If there is more buying than selling then the market will move up. If there is more selling than buying, the market will move down. Before anyone gets the impression that the markets are this easy to read, however, there is much more going on in the background than this simple logic. This is the important part of which most non-professional traders are unaware! The underlying principle stated above is correct; however, supply and demand actually work in the markets quite differently. For a market to trend up, there must be more buying than selling, but the buying is not the most important part of the equation as the price rises. For a true uptrend to take place, there has to be an absence of major selling (supply) hitting the market. Since there is no substantial selling to stop the up move, the market can continue up.

What most traders are completely unaware of is that the substantial buying has already taken place at lower levels as part of the accumulation phase. And the substantial buying from the professional operators actually appears on the chart as a down bar/s with a volume spike. VSA teaches that strength in a market is shown on down bars and weakness is shown on up bars. This is the opposite of what most traders think they know as the truth of the market. For a true downtrend to occur, there must be a lack of substantial buying (demand) to support the price. The only traders that can provide this level of buying are the professional operators, but they have sold at higher price levels earlier on the chart during the distribution phase of the market. The professional selling is shown on the price chart during an up bar/s with a volume spike, weakness appears on up bars. Since there is now very little buying occurring, the market continues to fall until the mark down phase is over. The professional operator buys into the selling that is almost always created by the release of bad news; this bad news will encourage the mass public (herd) to sell (almost always for a loss). This professional buying happens on down bars. This activity has been going on for well over 100 years, yet most retail traders have remained uninformed about it—until now.