Volume Spread Analysis (VSA)
Volume Spread Analysis Rules
Volume Spread Analysis is a study focused on the analysis of volume and price data to see the distribution of Supply and Demand. Volume Spread Analysis Rules combine the major factors that help recognise either an increase in Demand or an increase in Supply which is used to estimate the future price trend.
Volume Spread Analysis (also called as Volume-Price Analysis) could be quite complicated and confusing. Different analysts may have different interpretation of "Smart Money" actions behind the volume-price changes. Therefore, before going into explanation of the chart patterns, signs of weakness and signs of strength, it is necessary to set main ground rules which are lying at the core of the foundation of volume price analysis.
Most of the rules below are evident, yet, i is important to list them in order to understand the volume price analysis.
Supply Demand
Price is moved by Supply and Demand. Supply is generated by the Bears - it is Bearish pressure. Demand is created by the Bulls - it is Bullish pressure
Strength & Weakness
Volume Spread Analysis looks for Strength and Weakness - it looks for signs of weakness in an up-trend and it looks for signs of strength in a down-trend. In addition VSA looks at the background - what was in the past.
Volume
Volume is 2-side transactions. It tells us the number of shares changed hands. This is the number of shares distributed by the Bears to the Bulls. Number of shares sold by the Bears is equal to the number of shares bought by the Bulls.
Bullish Pressure
When Bullish pressure is stronger than the Bearish pressure price moves up.
10 Buys + 5 Sells = 5 Unsatisfied Buys
These unsatisfied buying orders move price up. The more unsatisfied Bulls are out there, the stronger price up-move we witness.
10 Buys + 5 Sells = 5 Unsatisfied Buys
These unsatisfied buying orders move price up. The more unsatisfied Bulls are out there, the stronger price up-move we witness.
Bearish Pressure
When Bearish pressure is stronger than the Bullish pressure price declines.
5 Buys + 10 Sells = 5 Unsatisfied Sells
These unsatisfied selling orders push price down. The more unsatisfied Bears are out there, the stronger price decline we witness.
5 Buys + 10 Sells = 5 Unsatisfied Sells
These unsatisfied selling orders push price down. The more unsatisfied Bears are out there, the stronger price decline we witness.
Unsatisfied Bulls and unsatisfied Bears
As price moves up we do not know how many unsatisfied Bulls are out there.
The same with price decline - we do not know how many unsatisfied Bears are out there.
The same with price decline - we do not know how many unsatisfied Bears are out there.
Increase in volume to price up-move
When we see increase in volume to the price up-move, it means we have increase in Bearish pressure. New Bears are trying to satisfy the Demand of the unsatisfied Bulls and it lead to an increase in volume.
We do not know whether these new Bears will be able to overcome the unsatisfied Bulls and reverse a price trend down. We only know that the Bearish pressure is increasing.
We do not know whether these new Bears will be able to overcome the unsatisfied Bulls and reverse a price trend down. We only know that the Bearish pressure is increasing.
Increase in volume to price down-move
When we see increase in volume to the price down-move, it means we have increase in Bullish pressure. New Bulls are trying to satisfy the Supply of the unsatisfied Bears and it lead to an increase in volume.
We do not know whether these new Bulls will cover all supply of the unsatisfied Bulls and a reverse a price trend up. We only know that the Bullish pressure is increasing.
We do not know whether these new Bulls will cover all supply of the unsatisfied Bulls and a reverse a price trend up. We only know that the Bullish pressure is increasing.
Decline in volume no reversal
When after high volume during price up-move, we see a decline in volume and price continues to move up (no changes in price trend), it means that Bearish pressure weakens. The Bears are letting the Bulls to ride the price up.
When after high volume during price decline, we see a decline in volume and price continues to decline (no changes in price trend), it means that Bullish pressure weakens. The Bulls are letting the Bears to push price down.
When after high volume during price decline, we see a decline in volume and price continues to decline (no changes in price trend), it means that Bullish pressure weakens. The Bulls are letting the Bears to push price down.
Decline in volume after reversal
When after high volume during price up-move, price starts to decline on lower volume, it means that the Bears satisfied most of the Bullish demand and the Bulls yielded to the Bears. The Bears won the fight.
When after high volume during price decline, price starts to move up on lower volume, it means that the Bulls covered the majority of the Bears' supply and the Bears yielded to the Bulls. The Bulls won the fight.
When after high volume during price decline, price starts to move up on lower volume, it means that the Bulls covered the majority of the Bears' supply and the Bears yielded to the Bulls. The Bulls won the fight.
Increase in volume after reversal
When after high volume during price up-move we have a reversal down and we see increase in volume, that mean that the Bullish pressure is very strong and high (even stronger) Bearish pressure is required to beat the Bulls. The fight between Bulls and Bears continues. The Bears are stronger than the Bulls at this moment, yet, the Bulls are not ready to yield.
When after high volume during price decline we have a reversal up and we see further increase in volume, that mean that the Bearish pressure is strong and stronger Bullish pressure is required to beat the Bears. The fight between Bulls and Bears continues. The Bulls are stronger at this moment, yet, the Bears are not ready to yield.
When after high volume during price decline we have a reversal up and we see further increase in volume, that mean that the Bearish pressure is strong and stronger Bullish pressure is required to beat the Bears. The fight between Bulls and Bears continues. The Bulls are stronger at this moment, yet, the Bears are not ready to yield.
By V. K. for MarketVolume.com
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